| Whatever the reason a person chooses to refinance his property, he should expect some costs associated with the new loan. Depending on the lender and the type of loan obtained, many refinancing borrowers should expect to pay the lender the typical costs associated with any new mortgage loan.
The costs associated with a refinance often include such things as loan fees, points, title insurance, and other expenses. Many borrowers wonder why title insurance is often required when refinancing. The following answers provide some explanation to the more commonly asked questions on this subject.
Why do I need to purchase a new title insurance policy on a refinanced loan?
To the lender, a refinance loan is no different than any other home loan. Thus, lenders want to ensure that their new loans are protected by title insurance, just as the original lender required. This helps protect the lenders interest in the loan.
Why does a lender need title insurance?
Most lenders generate loans and then immediately sell those loans to secondary market investors, such as the Federal National Mortgage Association (FNMA, usually called "Fannie Mae"), or the Federal Home Loan Mortgage Corporation (FHLMC, usually called "Freddie Mac"). In order to protect their security interest in the loans they purchase, these investors require new title insurance coverage for the property. Even those lenders who keep
original loans in their portfolio are wise to get a title policy to help protect their investment.
When I purchased my home, didn't I buy a lender's title policy?
Probably. If a conventional lender was used, an ALTA* extended policy, or lender's title policy, would have been required. Typically, the buyer pays the cost for this coverage (though this can vary, according to the terms of the purchase contract).
However, even if an ALTA policy was purchased along with the home, this lender's policy remains in force only during the life of the loan that was insured. When a property loan is paid off, as in the case of a refinance, the life of the loan expires when the new loan is issued, and the new lender needs a new title policy.
What about my original title insurance policy?
Each typical home purchase provides the new owner with an owner's title insurance policy that is separate from the coverage that is purchased for the lender. This owner's policy stays in force as long as that owner, or his heirs, owns the property.
When a person refinances, his lender requires the purchase of a new lender's title policy to protect the lender's security interest in the property. The lender's policy provides different coverage than an owner's policy, and costs less. The price of a typical owner's policy is usually about two to three times higher than the price of a typical lender's policy.
What could possibly have happened since I purchased my home that warrants a new lender's policy?
After the original loan was made, owners can do a number of things that could hinder a lender's ability to foreclose on the collateral if a borrower failed to pay his loan as required. An owner may have taken out a second loan on the property, or ordered work for which a mechanic's lien was placed against the property. The owner also could have had other liens or judgments recorded against him, such as child support
liens or civil court judgments—events that could result in serious financial losses to an unprotected lender.
Regardless of the length of time since a property was purchased or refinanced, a myriad of title defects could have occurred. While most homeowners do not have any title defects, many do. The only way for a lender to adequately protect itself is to require a new lender's policy each time a property is purchased or refinanced.
Are there any discounts available for title insurance on refinance transactions?
Yes. Most title companies offer a refinance transaction discount, or a short-term rate. Discounts may also be available for using the same lender on a refinance loan as on the original loan. Borrowers should be sure to ask their title company representative what title insurance discounts may be available.
* American Land Title Association |
