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Understanding The Different Types of Insurance During A Home Purchase

The buyer in a real estate transaction is paying a lot of fees and often people are concerned they are paying for more than they need. One of the biggest sources for confusion is the variety of different types of insurance that are in play in a real estate transaction. The three in play are going to be the homeowner’s insurance, mortgage title insurance, and finally owner’s title insurance. In most transactions you will be paying for all three of these policies but knowing what you are paying for can make the transaction a less stressful process. Lets start out with the one that is most easily known and understood, your homeowner’s insurance policy.

 

In almost every transaction you will be opening a new home owner’s insurance policy for your own benefit and also for your lender’s. This policy is going to be insurance for risks that can occur in a future time. It is protection from damage to the home or property that would result in a loss of value to the property. The concept is easy to grasp because it is the basic principle behind all insurance policies, pay now a small amount so that if damage or harm were to occur later then you have a safety net of funds coming to make up for that loss. The same principle is behind auto insurance or health insurance. Pay now for protection later.

 

You get this insurance for two reasons. First, you want to protect your own interest in the property. A home is often one of the two most valuable assets a family possesses, along with their retirement plan. You want to make sure that your investment in the property does not go away due to a storm, fire, or other unforeseen circumstance. The second reason that you get this protection is because your mortgage lender will require it. Not only do you have an interest in the property, so does the lender. Should your house be destroyed and you do not have insurance to repair it then you no longer have motivation to stay current on mortgage payments. This is the lender’s worst case scenario, a borrower who does not pay and a home that is not worth anything. These are the two reasons that you get homeowners insurance, to protect your interests and the lender’s.

 

The two following types of insurance are title insurance policies. Title insurance is a strange concept because it does not follow the normal logic that is easy to follow with other insurance policies. Title insurance, unlike other types of insurance, covers problems that have already happened, yet are unknown to any of the parties to the transaction. Such problems are defects in the title of the property, or defects in the ownership of the property. Title, a legal term of art, is a means of describing property ownership to the world. Defects will be errors in the history of ownership or there are problems with the description of the property matching reality. When problems surface in title it can mean that you bought the house who had no right to sell it to you, and therefore you could lose the house. Therefore, it is a problem that had already existed, there was just no notice of it. The insurance policies protect from the risks of defects.

 

As noted before title insurance has two different policies. There is mortgage title insurance and owner’s title insurance. These two policies are both title insurance policies, the difference is who is protected by the policy. With mortgage title insurance the lender is protected and with owner’s title insurance the buyer is protected. If you are buying a home with the help of a lender they will require you to buy mortgage title insurance, to protect their loan from defects. The buyer pays for this as a contingency of getting the loan, the lender does not pay for it. The owner’s policy, that protects a buyer, is an option coverage which you can elect to buy in addition to paying for the mortgagee’s coverage. As a buyer you need to decide whether to pay for this coverage or not.

 

There are mixed opinions on whether to pay for title insurance or not in the real estate and legal community. The pro’s to getting the insurance are that you are protected from defects, it is reasonably affordable, and it is a single one time payment. The con’s are the extra money you are paying and the lender is already comfortable with the title history to the point they are willing to give a loan. Keep in mind this is one of your most valuable assets when considering this and ask the opinion of the professionals you are working with.
To recap, there are three policies that you will be seeing at a closing table. The home owners insurance, the mortgage title insurance, and the owner’s title insurance. If you are using a mortgage to buy the home you are already required to buy the first two policies and the owner’s title policy is optional. Knowing the basics of these policies should help make the purchase easier to understand so that you can see the real costs of the whole purchase.

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