When attorney Mark Rutzick sold his home in Fairfax, Va., and bought a new one in nearby Oakton, he made what many might consider a risky move: He turned down title insurance. While lenders require borrowers to pay for the insurance that protects loans against unexpected liens and other claims, owners often have more leeway when it comes to insuring their own home equity.
Since Rutzick's new home had only two previous owners, he says, "The chances of a hidden grantor coming out of the woodwork and saying 'I own it and you don't' is so incredibly small, [title insurance] just seems unnecessary." He estimates he saved himself about $3,600 by not buying owner's title insurance.
While shaving a few thousand dollars off closing costs is tempting, many in the real estate industry recommend against it. Pam Hamrick, vice president of LendingTree.com, says she has seen customers without title insurance policies run into problems that are expensive to clear up. "It's like homeowner's or auto insurance. No one wants to pay for it, but when you need it, not having it is unthinkable," she says.
Even relatively new homes, such as Rutzick's, carry risks, adds Hamrick. Liens can be placed by builders, contract workers, and previous landowners or their heirs. "It is possible that there were ownership change issues prior to the builder owning the land or...that the transfer of title from the previous landowner to the builder was done improperly," she explains.
According to the American Land Title Association, which represents insurers, about 5 cents of every dollar collected in premiums is paid out in claims. That number would be much higher, says Chief Executive Kurt Pfotenhauer, but the cost of title insurance includes an upfront investigation into potential problems. One in three properties has some complication or defect with its title that needs to be fixed before the final sale, he says.
Pfotenhauer adds that title insurance protects owners against challenges to the boundaries of their property, a frequent issue for homeowners. "The company would step in and handle court costs," he says.
To minimize the cost of title insurance premiums, consumers can price shop for the best deal. (Title insurance is regulated by states, so the exact rules vary by region, and in some cases sellers cover the cost.) Websites such as Bankrate.com provide estimates of title insurance fees and other closing costs. According to a Bankrate survey, the average cost of title insurance, which is paid only once when the home is purchased, is just over $700. The American Land Title Association's consumer website offers contact information for local insurers to assist consumers who want to shop around.
Because the fees are regulated, the rates don't vary drastically from insurer to insurer, but advance comparison shopping can save consumers a couple of hundred dollars, the association estimates.
Those savings are relatively small compared with the cost of buying a home. That, along with the fact that most people are unfamiliar with title insurance, discourages consumers from comparison shopping, reports the Government Accountability Office. The government watchdog recently recommended that the Department of Housing and Urban Development, which oversees title insurance along with state regulators, make it easier for consumers to shop by price.
Consumers willing to absorb the additional risk themselves, as Rutzick did, can avoid the cost of an owner's title insurance policy altogether. "I'm comfortable weighing the risks and costs," Rutzick says. "But most people aren't."