Is title insurance worth buying?
Ever been stuck at a cocktail party with a blowhard who’s leaning in a little too close? Just launch into a monologue on the relative merits of title insurance and even the most booze-fogged windbag will go running for cover.
Title insurance. How boring.
How boring, indeed, until two days before closing on the purchase of your first home, and your attorney calls saying that your mortgage has been approved, the former tenants were removed by the sheriff, the radon’s been remediated, and oh, by the way, do you want title insurance? “Huh?”, you say. “What tenants? I thought those were the owners? And what was that about insurance?”
What is Title Insurance?
Title insurance protects you in case there’s a problem with the title to the property. Problems happen when ownership of the property is not clear, when there is fraud or forgery, or (most commonly) due to simple clerical mistakes.
Lender’s policies and Owner’s policies
There are two types of policies: one that protects the lender (your mortgage company) and one that protects the owner.
The lender may require title insurance for the amount of the loan value. Title insurance is usually necessary for the loan to be sold. Lender’s title insurance is only good for the term of the loan and may need to be purchased again if you refinance. A lender’s policy does not provide protection for the owner.
An owner’s policy protects the owner for the purchase price of the property. It is good for as long as you own the property and does not need to be re-purchased if you refinance.
How much does it cost?
The cost of title insurance varies by state. Here in Massachusetts, an owner’s policy runs about 0.30-0.40% of the property purchase price, meaning that insurance for a $300,000 home will cost you about $1,000. A lender’s policy is only for the amount of the loan and the rate is usually lower, about 0.20 – 0.30%. Note that much of the premium, 80-90%, is paid as commission to your attorney. He has a vested interest in selling you this insurance.
Is it worth it?
In April 2007, the General Accounting Office published a scathing report on title insurance, citing lack of competition and problems with the “affiliated business arrangements” between realtors, attorneys, builders, and others, and the title insurance companies. The report also highlighted differences in the way property ownership is recorded and tracked in different states within the US. The variations lead to consumer confusion. Also. since the transaction occurs only a few times during the typical consumer’s lifetime, is tied to a very large transaction (their purchase of their home) that they want to ensure proceeds, and add in the fact that most lenders require lenders’ insurance, and you have a situation that is highly unfavorable to the consumer.
Since 80-90% of the price is commission, then the actual cost of the insurance is only 10-20%. That is, the probability of a claim multiplied by the expected cost of the claim, less expenses and profit, is only 10-20% of what you’re paying. On the face of it, it seems like a very bad deal. However, if there is a problem, then your largest single asset (for most of us) is at stake.
It typically makes sense to insure low probability events that would have a large impact on your life. For example, term life insurance is relatively cheap, especially when you’re young, because it is extremely unlikely that you’ll die. However, if you do, it’s a tremendous impact to the spouse and kids that you leave behind. Therefore, life insurance (again, term life) is a good idea if you’re young and have a family. Title insurance falls into this category of “good things to insure,” but the price is outrageous and non-competitive. Life insurance is much more competitive and is regulated by state commission, keeping the premiums aligned with the actual cost of insuring. Title insurance is not regulated — another factor allowing it to command exorbitant prices.
Is there a better way?
Most other civilized nations have a government organization to track property ownership. For a simple fee, the ownership is transferred between buyer and seller. While I’m not a fan of increasing government, I think that the average American is getting ripped off by title insurance. Even the GAO agrees that the consumer needs additional protection. How about a quasi-governmental organization, like the post office, that is allowed to charge fees to sustain its operation?
I can’t imagine a less politically-sexy subject than title insurance, but then I never thought the country could get all worked up over collateralized debt obligations (CDO’s). I’d rather get health care straightened out and Iraq and Afghanistan back to peaceful, self-sustaining nations. But if we don’t start talking about title transfer and insurance now, it’ll never happen. How about it? Anyone up for a little government action? Mr Obama? Mr. Frank? Mr. Nader?
Photo credit: Pierce Place
By day, Helen engineers new materials to make computer chips cheaper, better, and faster. When the son goes down (pun intended), she writes about personal finance at Affine Financial Services.
I generally consider title insurance a waste of money too, and so declined it when I bought my first home. But when I bought my current home, I found out the night before closing that the very elderly and rather confused sellers had only just discovered two outstanding mortgages on the property that they’d forgotten about, on top of the two they had known about. The whole situation seemed questionable enough that I opted for owner’s title insurance that time. I’ve never tried to sell this house, and haven’t needed to use the title insurance. But I still don’t particularly regret the $400 or so that I paid for it; the peace of mind was worth it.
S: Sounds like a good call to get title insurance in your situation. I’m not sure how a property could have 4 mortgages on it — I don’t think I want to ask. I agree that the peace of mind insurance buys can be worth it.
Helen, the 4 mortgages were due to various refinances that the sellers had thought were paid off, but had no record of. Or something like that; even the sellers didn’t seem to understand it. I suspect they lived fairly tumultuous lives, financially. Within a year after they sold me the house, they both died, and then for a while I was getting phone calls from creditors looking to go after their estate. (Even though my phone number had never been theirs, I guess the callers got mine via the address.) Luckily, I had saved the seller’s obituary from the newspaper, and just kept telling the callers, “I don’t know anything about their finances, but their kids are named ___ and ___ and they live in these towns according to the obituary.” The creditors seemed happy enough with that info that they stopped pestering me. But again, I was glad for the peace of mind from the title insurance!
There really needs to be a proper centrally registry for land ownership, that way there’s no way mortgages can go “missing” and the need for title insurance would be negated.
S: I seems incredible that the bank would give 2nd, 3rd and then 4th mortgages without proof that at least some of the previous mortgages were paid off. But I’m sure it happens, as in your case.
Mattwi: Yes, there needs to be a central registry. Some states have tried before, but it didn’t take. Maybe it needs to be created at the national level. I see your website address is from the UK. How is property tracked on your side of the pond?