Title Insurance and Mortgage Refinancing: What Lenders and Borrowers Should Know

Spring is in the air, and for many homeowners, that means considering a mortgage refinance

With interest rates hinting at a downward move, it’s a prime time to evaluate your current home loan and potentially secure significant savings. But amidst the excitement of lower monthly payments, one crucial step can sometimes be overlooked: title insurance.

While refinancing can help you utilize some of your hard-earned equity for renovations, paying down debt, and more, it’s not without its costs, including a new lender’s title insurance policy. Let’s take a closer look into the importance of title insurance in mortgage refinancing and shed some light on the essential considerations for both lenders and borrowers.

A Deeper Understanding

Title insurance is necessary to protect homeowners and lenders against any problems affecting the title of a home. There are two types of policies: lender’s title insurance and owner’s title insurance.

For your lender, the policy ensures that the buyer has clear ownership of the property and it’s free and clear of any defects. Even if you stay with the same mortgage company, they typically require a fresh title search and insurance policy to protect their investment. 

However, homeowners do not need to purchase a new title insurance policy — the policy bought at your original closing is in effect as long as you or your heirs own the residence.

Clouds on the title can arise between the original purchase and your decision to refinance. These defects can stem from past occurrences such as:

For lenders facilitating mortgage refinancing transactions, it is imperative to prioritize title insurance as a risk management tool. The title clearance process safeguards the financial institution’s interests and investment, enabling that organization to keep mortgages accessible and affordable for other hopeful buyers. 

Benefits for Borrowers

Refinancing your home can have distinct advantages, but it’s important to do your research and partner with an experienced real estate team who can guide you through the complexities of this process. 

If you didn’t purchase a title insurance policy as part of the original real estate transaction, securing one now can save you from costly legal battles or financial losses in the event any title defects or challenges arise.

New buyers or those interested in refinancing should be aware of exactly what is covered in their policy — and what is NOT covered. Title insurance is not the same as homeowner’s insurance, and typically excludes protection against environmental hazards, mold damage, or restrictive covenants like those in some homeowner’s association agreements.

For borrowers who are hoping to refinance to make their fixer-upper into a showstopper or create an accessory dwelling unit, it’s imperative to speak with a knowledgeable attorney or title officer before proceeding with any major construction projects. Unpermitted work can throw a wrench into renovation plans, and the lender could deny your refinance application.

If you’ve got enough equity in your home, you may be considering a cash-out refinance to purchase an investment property. While this move can offer appealing rental income and certain tax advantages, it may not be the best path forward depending on your situation. It’s always smart to do your due diligence and consult with an attorney or financial expert.

Here in the Upper Midwest, property records can sometimes be more complex due to historical land use and ownership patterns. Boundary disputes can be more common in urban areas like Chicago or Madison. A lender’s title insurance policy adds an extra layer of protection against such potential issues specific to our region.

The Bottom Line

Now could be the ideal time to refinance your home, but many factors need to be considered before you proceed. While you could lower your monthly payment and get funding for upgrades, debt consolidation, or other goals, it’s vital to fully explore your options.

Title insurance plays a critical role in mitigating risks and ensuring a seamless transaction for both lenders and borrowers. At Landtrust, we offer an array of services during the closing process and unparalleled assistance to our valuable clients.

If you’ve got questions or concerns, we can help. We’re a trusted partner to real estate professionals across Illinois and Wisconsin, so reach out to start the conversation today!

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