Consumer protection is what title insurance is all about

Limited housing supply and a continuation of high home prices in many markets nationwide in 2023 restricted many first-time homebuyers from entering the housing market and finding their dream homes. But there appears to be a light at the end of the tunnel as mortgage rates are expected to steadily decrease, allowing homeownership to be within reach for more Americans.

Even as home prices began to decrease last year, mortgage rates remained high, leading both buyers and sellers to stay out of the housing market. Existing home sales fell to their lowest point in nearly 30 years in 2023, while the median price of a home reached a record high, according to the National Association of Realtors (NAR). Additionally, the market experienced fewer refinance transactions given that the roughly 80% of homeowners with a mortgage rate of 5% or less were not interested in exchanging their low rates for a higher one.

However, the Federal Reserve is expected to slacken its monetary policy this year, lowering the high interest rates they imposed to counter inflation. Lower interest rates will not only improve the market for buyers, but it will also encourage more refinancing, particularly for recent homebuyers who stretched their budgets on higher rate loans. The Mortgage Bankers Association predicts that the average rate on 30-year mortgages could be 6.1% by the end of 2024.

With a wave of new home purchases and refinance transactions expected, as an industry, we’re expecting many new questions about how buyers and owners can best protect their property rights. In fact, for many new buyers entering the market this year, this will be the first time they ever hear the words “title insurance.” Against this backdrop, it is critical that new homebuyers and homeowners alike understand what title insurance is, its benefits and the importance of asking about discounts available to them.

What is title insurance?

Title insurance is a comprehensively regulated insurance product that has been trusted to protect property rights for over a century. It differs from other insurance products in that it is a one-time payment during closing that not only provides comprehensive coverage if a problem arises, but it also works to ensure clear property ownership rights before closing day. Title insurance companies have lower claims rates than other types of insurance because title professionals work to resolve potential issues before they develop into claims. The most common causes for loss are mortgages, judgments, liens and mechanic’ liens. Additionally, about a third of all claims result from issues that can’t be found in the public record.

In the event someone comes forward with a title claim, such as an undisclosed heir to a property or an outstanding repair payment, title insurance also protects the homeowner’s property rights and will cover any financial burdens of settling a dispute.

There are two forms of title insurance: an owner’s policy and a lender’s policy. Given a lender’s policy only protects a lender’s investment against any title issues that arise, homeowners should always purchase an owner’s policy to protect themselves. 

What does title insurance cost?

According to a recent study, title and settlement charges typically make up less than 1% of a borrower’s total life-of-loan costs. Additionally, as rates of other forms of insurance have continuously increased, the cost of title insurance has actually decreased by 7.8% nationally since 2004, according to an analysis of industry financial statements.

The majority of states nationwide are “seller pay” states, in which a homebuyer only needs to pay for a lender’s policy because the seller customarily pays for the homebuyer’s owner’s policy. Additionally, when an owner’s policy and lender’s policy are issued simultaneously, many companies offer a reduced price for these policies. Homebuyers should explore all these potential cost savings when purchasing their home. Consumers are encouraged to shop around for title insurance and can find a title company to work with in their market at homeclosing101.org.

Why is title insurance important in a refinancing transaction?

Even when refinancing, homeowners still need to purchase a new lender’s policy. That is because title insurance is attached to the loan. Between the time that a new loan is originated and refinanced, new title defects may have arisen. For example, a homeowner might have a judgment on their house due to unpaid taxes, homeowner association dues or child support. 

Luckily, many title companies offer discounts on refinance transactions and discounts if the same lender from your original loan is used. We encourage those looking to refinance their mortgage to reach out to their title company and see if they offer these types of discounts.

Title insurance protects the consumer

As an industry, we are committed to helping homebuyers and homeowners understand how title insurance can protect their property rights from unimaginable threats. Buying a home is the largest purchase most Americans will make in their lifetime. Having title insurance is critical to protect that asset. With homeownership expected to become more accessible in 2024, title insurance professionals are ready to help homebuyers navigate the process.

Diane Tomb is CEO of the American Land Title Association.