One of the most common questions I get asked is “What is Title Insurance?” and “Do I need it?” Let’s spend a few minutes together to cover this topic most people think is boring, but ironically, is one of the largest single expenses of all the typical closing costs in a transaction.
Title Insurance is exactly what it sounds like. It is an insurance policy covering the title of the property you own or are about to purchase. It covers what we call “defects in title”. Those defects can vary from ownership claims to claims regarding easements or encroachments.
When you first purchase a property you are given the opportunity to purchase Title Insurance. A title policy issued to you the buyer is not required. If you do decide to purchase title insurance, that policy remains in effect until you sell/transfer title in the future. The standard Hawaii Real Estate Sales Contract divides the cost of the “owner’s policy” this way: the seller pays 60% and the buyer pays 40%. And just like with other types of insurance, there are “premium” or “gold” or some other name for a policy that provides more benefits. You should consult with your Title Officer as to the various title policies being offered, and decide the best policy for your needs.
If financing is involved with your transaction, your lender will also require they be issued a title policy. The good news on a purchase transaction is that if you are obtaining an owner’s policy, the lender’s policy is drastically discounted in price. But since an owner’s policy is not required, if you chose to opt out of getting an owner’s policy, you will pay the entire full cost of the lender’s policy. The 60-40 split mentioned earlier only covers the owner’s policy – not the lender’s policy.
If you are refinancing a property, your lender will require a new lender’s policy be issued to them. Title policies cannot be transferred. They are issued to the policy holder for as long as they hold an interest in the property. In the case of the lender’s policy, the insurance is actually issued to the specific loan instrument itself, not to the lender. That is why when you refinance your old loan into a new one, the old policy goes away, and a new policy is required.
Title insurance is important, and I recommend everyone obtain it. You may never hear of people needing to utilize their title insurance, but it does happen. It actually happened to me!
I owned in investment condo that was assigned 3 parking stalls in the complex. After owning the property for a year, my new tenants actually required the use of the 3rd parking stall the previous tenants didn’t use. My new tenants informed me that the neighbor was using the stall and claimed it to be there’s. I pulled out my deed and checked. I was correct – my deed listed that disputed parking stall as being my property. I contacted the neighbor and kindly told him of my research. He was a nice guy and said he wanted to check his deed. He had lived in that complex for 15 tears, and always thought he owned that stall. He checked his deed, and amazingly, his deed also listed the same stall as his property. This is what a “defect of title” looks like. We both contacted our respective title companies. They both did their research and found that when the condo units were originally sold by the developer they sold the same parking space to 2 different people. It is amazing that it took almost 30 years for someone to discover this. Neither he nor I were the original owners. In fact each unit was bought and sold 2-3 times since the project was originally built.
The title research came back and determined that the original owner of my unit was the party that was first issued that parking stall. The defect was on the neighbor’s title because his original title report showed he owned the parking stall – a mistake. The cure was to either buy the neighbor another stall in the complex, or provide him equal compensation. Since he didn’t need the stall any further, he opted for a cash payout of $15,000.
If I had not obtained title insurance, I would have had to pay for my defense on my own. With my title policy, the title company used their staff and attorneys to work on my behalf. If my neighbor had not opted for title insurance, he would have received nothing.
Although title insurance is optional for you the homeowner, I strongly recommend you get it. Also, check with your title office as to the various levels of policies available, and determine the right policy for you.