Is title insurance a waste of money? The truth behind this often-questioned fee

What you’ll learn

— What title insurance is and how it works

— What title insurance protects homebuyers and lenders against

— The costs, risks, pros, and cons of purchasing title insurance

When you’re buying a home, you’re already paying a major amount of cash to cover the down payment, closing costs, and a pile of other odds and ends. It’s only natural to wonder if you can skip optional costs like title insurance to lower your bill.

While this coverage isn’t mandatory, the financial risks of not having it can be staggering. The average cost of dealing with fraud, for example, is over $140,000. If you don’t have title insurance, you’d be responsible for covering this loss.

This guide answers the hundred-forty-thousand-dollar question: “Is it worth it, or is title insurance a waste of money?” You’ll learn how title insurance works, which issues it protects you and your lender against, and pros and cons so you can make the right decision.

What’s title insurance?

Toward the end of a real estate transaction, a title insurance company will run a title search to confirm the seller’s legal ownership and uncover any problems. These “title defects” include issues like liens for outstanding mortgage debt or forgeries in the paper trail. When they show up before closing, the financial burden is on the seller to cover them.

Title insurance policies step in when past defects are discovered after closing. The insurance company pays out to cover attorney fees and financial losses connected to clearing the title.

Some defects are relatively easy to fix, like clerical errors or typos in the public record. Some are much more complicated and much more expensive as a result. That’s what a title insurance policy is for. If there’s a defect that costs thousands, tens of thousands, or even hundreds of thousands to resolve, you can breathe easy knowing it’s taken care of if it’s covered in your policy.

Some skeptical homebuyers go so far as to wonder, “Is title insurance a scam?” The short answer is no. For many homeowners, the added cost of buying a title insurance policy is well worth the peace of mind. And as long as you choose a trusted title insurance company, you won’t have to worry about getting scammed.

Owner’s title insurance vs. lender’s title insurance

So, what’s owner's title insurance, and what makes it different from lender’s title insurance? You’ve probably already guessed the primary distinction. Owner’s title insurance protects homebuyers from having to cough up the funds if defects in the property’s legal history are found after closing. Lender’s title insurance protects lenders from the same kinds of issues.

Another key difference is that most lenders require you to take out a lender’s title policy. Owner’s title insurance is always optional. 

Do I need owner's title insurance? What it covers

Owner's title insurance isn’t required, but it’s often recommended by real estate experts. That’s because it often protects you from the following title defects:

— Outstanding liens: These are any unpaid debts on the home, like outstanding mortgage payments, HOA fees, or taxes.

— Easements: Easements are legal rights for third parties to use your property for specific purposes, like sharing a driveway or accessing equipment for utility maintenance. If a dispute about an undocumented easement arises, your title policy may help cover the legal fees.

— Ownership disputes: A common example is when a previously unknown heir comes forward to make a legal claim to ownership.

— Deed defects: Issues like forged signatures, illegally altered records, and paperwork errors can break the chain of title and lead to ownership disputes.

Lender’s title insurance protects against the same types of defects as owner’s title insurance.

Title insurance costs vs. title insurance risks

Owner’s title insurance and lender’s title insurance differ significantly when it comes to pricing. The average cost of lender’s title insurance hovers around 0.1% of the loan amount. Owner’s title insurance is more expensive, averaging about 0.4%. You’ll also have to pay title fees averaging $1,000 to compensate the title agents for their work.

While 0.4% is nothing to sneeze at, it’s an investment that can pay off for a long time. You only pay once, and it lasts for as long as you own the home. It even protects your heirs if you decide to pass the home down.

You may be able to get a discount from your title insurance company if the seller took out a policy within the last few years. This is because the previous title company already did the research, making it less likely that new issues will pop up when the new one runs another title search.

Although title claims don’t happen very often, they can be very expensive when they do. We saw above that dealing with fraud can cost upwards of $140,000. Other types of title claims average $26,000. That’s a lot less, but you’d probably rather spend it on a kitchen makeover than on navigating a legal headache.

Overall, title insurance is similar in principle to emergency medical insurance. You hope you’ll never need it, but you’ll be deeply relieved to have it if you do.

Is title insurance worth it? Pros and cons

The answer to this question depends on your risk tolerance and financial situation. Here are some of the biggest advantages and drawbacks to help you decide.

Pros

— Protection from financial losses: This is the core benefit of taking out a title insurance policy. Few things are more disruptive than getting a big, unexpected bill when you thought you were home free.

— Ownership security: You can rest easy knowing your ownership rights will stay secure as long as you own the home. If someone makes a covered ownership claim, title insurance can help cover the attorney fees and court costs.

— One-time fee: Once you’ve paid the up-front cost for owner’s title insurance, that’s it. You never have to worry about monthly insurance premiums for as long as you own the property.

— Marketability: If you decide to move, having a policy in place shows potential buyers a title insurance company has investigated in the past. While this doesn’t guarantee a clear title, it reduces the buyer’s chances of running into closing holdups.

Cons

— Increases closing costs: Since owner’s title insurance is optional, buying it will increase your costs by an average of about 0.4% of the home’s purchase price — not an insignificant sum, especially if your new home is on the pricier side. Since it’s a one-time fee, however, it won’t affect your monthly payment estimates.

— Title insurance scams: Title insurance scams are uncommon, but they’re out there. Fortunately, they’re easy to avoid as long as you do your due diligence. If you choose to work with us, Better Settlement Services will help you take care of title insurance quickly, smoothly, and fairly, with transparent fees and nothing buried in the fine print.

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So, is title insurance a waste of money?

No one can make the decision for you. If protection from rare but potentially costly surprises sounds worth it, getting title insurance may be a good idea.

On the other hand, if 0.4% or more of the purchase price feels too expensive and you’re comfortable with a little risk, foregoing title insurance is an option. Just keep your eyes open about the risks you’re exposing yourself to.

Put your homebuying journey in safe hands with Better

Owner’s title insurance can’t prevent title defects, but it can make them a whole lot easier to manage if they do make an unwanted appearance.

With Better, you get a trusted partner that understands how frustrating it can be to navigate the closing red tape. That’s why we provide in-house title settlement services, a closing process up to 10 days faster than the industry average, and 24/7 customer support to get you to the finish line.

Get pre-approved in as little as three minutes to see how much you can afford.

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