The District Chronicles

Issue date: 6/8/08 Section: Business

Media Credit: Freddie Allen

Dear Ms. Mortgage Maven,

I am refinancing my home of eight years with the same lender who holds my current mortgage. I was told that I need to buy a new title policy. It is very expensive. Can you explain why I have to buy a new policy, since I am using the same lender? It is expensive and I don't want to incur any unnecessary costs. Also, since I have owned the property for so long, I really do not foresee any title claims arising.

Thanks,

DJ

Dear DJ,

Title insurance is probably one of the least understood aspects of a real estate purchase. There are two types of title insurance: an owner's policy and the lender's policy. The owner's policy protects the owner of the property for the full value of the property, and the lender's policy protects the lender for the amount of the loan.

Unlike most insurance premiums that are paid monthly to protect against a future loss, (for example, you pay auto insurance each month to cover you in the event of a future accident), the title insurance premium is paid upfront to protect the policy holder from errors or weaknesses in the title that have already occurred but may not yet be discovered. The most frequently cited example of an error in the chain of title is a forgery. Other examples include unknown or missing heirs to a property.

Anyone who uses a mortgage to buy or refinance a property has to at least obtain a lender's title policy. Again, this policy protects the lender - not the buyer or owner of the property - from any claims that may arise against the title of the property. However, the lender does not pay for this insurance. In some states, it is customary for the buyer to pay for the title policy, in other states the seller may pay for it. (But in all jurisdictions, deciding which party pays for various closing costs, including title insurance, can be negotiated.) The lender will require enough title insurance to cover the amount of the loan. When purchasing a property, an owner's title policy can be issued at the same time, generally for an additional nominal fee, and will cover the full value of the property and protect the owner's equity against title claims.

The lender's title policy is in effect until the loan is paid off. In your case, since you are refinancing, when you pay the existing loan off with the new loan, the lender's title policy you bought eight years ago will no longer be in effect, and you will have to buy a new lender's policy to cover the amount of the new mortgage. For the new loan, the lender will want to know that you have not incurred any judgments against the property in the last eight years, from such things as mechanics liens, tax liens, homeowner's association dues, or unpaid child support payments recorded against the property.

However, you will not need to buy a new owner's policy. The owner's policy you bought eight years ago will remain in effect, as long as you or your heirs have any legal interest or obligation concerning the property.

As for obtaining a new lender's policy, be sure to ask for a discounted "reissue" rate. A cheaper reissue rate is often available if you are refinancing within 10 years since you bought or last refinanced the house.

Some states set the prices for title insurance, but not all. Depending on what state the property is in, it could be worth your while to shop around for the best price. Best regards.

Jessica White, also known as "Ms. Mortgage Maven," is a mortgage consultant with Tenacity Mortgage. Call or email her to discuss your home purchase or refinancing needs. She can be reached at 202-607-4449 or Jessica@msmortgagemaven.com. You can also apply online at www.msmortgagemaven.com.

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