Title insurance is a required fact of life when originating a new mortgage, but many homeowners question whether they need to obtain new title insurance when they refinance. Unfortunately, the simple answer is yes.
Title insurance is an insurance policy issued as part of the closing process when purchasing a home. It is a policy that protects the lender from any loss that may be sustained if a third party disputes ownership of the home after the loan has been made. Many people are understandably confused as to why the bank needs to be protected against title issues as opposed to the homeowner. Again the answer is simple; until you pay off your mortgage in full, the bank owns your home, not you. And they have every right to protect themselves from claims against that property arising from circumstances beyond their control.
If, for example, a home was jointly owned by two individuals and only one of those individuals signed the transfer deed at the time of sale, the second owner could still claim half ownership of the property and file legal proceedings against the bank to collect his or her half of the value. In this case, the title insurance would kick in and allow the bank to recoup whatever money it was forced to pay the aggrieved party.
Although it is highly unlikely that there will be any remaining disputes against the original deed by the time the homeowner chooses to refinance, the new bank will almost certainly require a new title insurance policy be issued to protect against any claims that may have been made against the property since the initial sale. Such disputes may include legal settlements made against the homeowner in which the house was claimed as an asset or something as simple as a mechanic’s lien filed against the property by a disgruntled subcontractor who was not paid for a service rendered to the homeowner.
There are very few options as to the type and cost of a title insurance policy, as these are generally regulated by the state or province in which the home is located. The one silver lining is that title insurance involves only a one-time fee and is generally quite affordable.
