Title Insurance: Coverage, Cost and Why It’s Making Headlines

Title insurance is one of those buy-it-and-forget-it financial products you encounter when purchasing a home or refinancing a mortgage — not often a hot topic around the water cooler.

Here's what you need to know about title insurance, whether you're buying a home or refinancing a mortgage.

» MORE: Calculate your closing costs

What is title insurance?

Title insurance is a policy that covers mortgage lenders or homeowners against losses related to the title, or ownership of the property.

Say, for instance, you buy a home and there's a hidden lien against the property. (A lien is a legal claim to the property related to outstanding debt.) Perhaps the previous owner stiffed a contractor or didn't pay property taxes. Now the unpaid bill is your headache — and your lender's — because the home is collateral for the debt.

Another nightmarish scenario: Missing heirs of a prior owner come forward and claim the home belongs to them, not you.

Normally problems like this would come to light before the closing, in a title search — an examination of public records to confirm who owns the property.

» MORE: Closing on a house: How long it takes, what to expect

Title insurance pays out in those rare instances when the title search misses something and a legal claim is made. The coverage protects the homeowner and lender from losses stemming from "title defects" that happened before the home purchase.

There are two types of title insurance policies — one for the lender and one for the owner.

Lender's title insurance

The lender's title insurance policy covers the mortgage lender. It's typically based on the amount of the loan and decreases each year as the mortgage is gradually paid off. If there's a problem with the title, the lender's policy only covers the lender's interests, not yours. Usually mortgage lenders require lender's title insurance when you buy a home or refinance a mortgage.

Owner's title insurance

The owner's title insurance policy covers you and is in effect for as long as you or your heirs own the property. Usually the coverage is equal to the purchase price of the home. If you're refinancing and already have a title insurance policy on your property, you'll continue to be covered by that policy.