With home values rising and interest rates at the lowest point we’re likely to see for a while, many homeowners are considering refinancing their homes to lower their monthly payments or to use the equity they have built to improve their homes or pay off other debts.
Refinancing, however, is not without transaction costs. Recording fees, credit reports, notary fees, and up-front points are some of the costs a homeowner might face in refinancing a home. In addition, refinancing can have an impact on the title insurance policies you acquired at the time you purchased the home.
Refinancing means replacing the mortgage you currently have on your home with a newer, presumably better loan. The original loan is paid off in full, and a new loan, often from a different lender, takes its place.
Homeowners refinance for a number of reasons: cashing out equity to make improvements or pay off other, more expensive debt; taking advantage of lower interest rates to reduce the total cost of the mortgage; meeting the lender’s requirements to drop mortgage insurance; or to swap an adjustable rate mortgage for a fixed rate one. Whatever the reason for refinancing, homeowners should consider the closing costs associated with a refinancing transaction when deciding whether to proceed.
The average refinancing transaction brings with it about $5,000 in closing costs. Homeowners looking to refinance should consider the cost of recording the new mortgage, costs of appraisal and credit reports, land survey fees, lender origination fees, and underwriting fees. Refinancing homeowners must also factor in the cost of a new lender’s title insurance policy.
What Is Title Insurance? A Refresher
Title insurance insures against claims on title that originated before the current owner’s ownership interest, but which were unknown at the time of the sales transaction. There are two types of title insurance: lender’s title insurance, also called the lender’s policy, and owner’s title insurance, or the owner’s policy:
Lender’s Title Insurance
Lender’s title insurance, required as a condition of most mortgages, protects the lender if there is a claim against the property’s title that predates the transaction. The lender’s policy protect’s the mortgage lender’s priority as a creditor in the event of foreclosure or a third-party claim to force the sale of the property.
Owner’s Title Insurance
Owner’s title insurance protects homeowners against claims against title that originated before the date of sale but were unknown on the date the sale closed. Owner’s title insurance is backward-looking — that is, it protects against title defects that may have existed at the time you received title to the property but that aren’t obvious until a later date.
What Happens To My Title Insurance Policy In A Refinance?
The owner’s title insurance policy, which protects the owner and the owner’s heirs, is unchanged by a refinance transaction. In fact, so long as the home does not change hands to anyone other than the owner’s heirs, the owner’s policy remains in effect regardless of whether the home is refinanced or paid off.
However, the lender’s policy is affected by the change. As noted above, a refinancing is not a negotiation of new terms for an existing loan; rather, it is the replacement of one loan with another. To the new lender, then, a refinance loan is no different than any other home loan. The new lender has the same interest in protecting its investment as the original lender, and the title insurance policy that covered the original mortgage is not transferable to a new mortgage lender. As a consequence, your new lender will require you to purchase a new title insurance policy to protect its interest in the integrity of your home’s title.
In most transactions in Illinois and Wisconsin, the buyer pays for the lender’s title insurance policy. However, even if you purchased a lender’s policy when you bought your home, the lender’s policy remains in force only during the life of the loan that was insured. Any “new” mortgage that is taken out will require a new lender’s title insurance policy of its own, at the expense of the homeowner.
Even if you have owned your home for years without a claim against title, your lender will still require the purchase of a new lender’s title insurance policy. The purpose of this requirement is twofold: first, an old claim — such as a claim of fraud or a previously unknown heir — may still be made against the home’s title. Second, title insurance is backward-looking. It only protects against events that have already happened at the time the policy is issued, and would not protect against claims on title that might have arisen since the current owner purchased the property. If the current owner has taken out a second loan on the house or had mechanic’s liens, tax liens, child support liens or legal judgments recorded against them, the original lender’s title insurance policy would be useless in the face of such a claim.
Learn More With Your Trusted Title Insurance Company
Protecting your interests and assets during a home purchase or refinance with title insurance may be the most important thing you’ll ever do — and you don’t have to navigate the ins and outs of owner’s and lender’s title insurance policies alone. If you have questions about what title insurance can do to protect you, what it involves, or how to get it, Landtrust Title Services can help. Please contact us today at [email protected] or by phone at 312.528.9210 to get answers to all of your questions.