Title insurance is a policy that protects your mortgage lender from potential claims against your property.

Because the property serves as collateral for the mortgage, a lender does not want to give someone money to purchase real estate, then have a third party dispute the borrower’s right to that property.

For this reason, lenders always require that you pay for a title insurance policy when you take out a mortgage.

If you’re shopping for a mortgage, use our How Much Can I Afford? Calculator before you talk to a lender.

The process of issuing title insurance looks for any existing problems with the title through a process known as a title search.

Any problems the title search reveals must be resolved before the lender will allow you to purchase the property. Title insurance then protects the lender against any claims that were not discovered during the title search.

Title insurance does not specifically protect you, the property owner, unless you purchase a homeowner’s title policy, which is not standard practice.

Title insurance also does not protect against claims that arise from events that occur after you take ownership of the property.

Title insurance is unlike most other types of insurance in that it protects against past events (which can have future consequences) rather than against future events.

For example, title insurance would protect against an undiscovered lien on the home from a contractor who never got paid by a previous owner, but it would not protect against a lien a contractor issued on the home for work that you ordered and did not pay for.

What types of claims can arise after a title search reveals an apparently clean title and a new owner has taken possession of a property?

An ex-spouse of a previous owner may try to claim a right to the property. A tax authority might try to collect on a lien it placed for unpaid taxes. Someone might discover that the property’s title was transferred in the past with a forged signature or by an incompetent person, that a previous mortgage was never paid off, or that there is an easement or restriction on the property.

With a title insurance policy, a title company will defend the property against such problems and pay the expenses associated with resolving them.

Any time you refinance, you will have to purchase a new title insurance policy, even if you refinance with the same lender. The lender wants to ensure it is protected against any claims that might have arisen against the property since the original policy was issued.

If the IRS has placed a lien on your home because you’re seriously delinquent on your taxes, the lender needs to know about it (they’ll also require that you resolve any issues you caused before they’ll allow you to refinance).

Title insurance costs are regulated at the state level, so premiums vary by state, but expect to pay between several hundred and a thousand dollars or so. This will be included in your closing costs.

Usually, borrowers do not shop around for title insurance, but you don’t have to use the company your real estate agent or lender typically uses.

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