Why Lenders Require Title Insurance When Refinancing Your Home

 
With interest rates historically low, many homeowners have become motivated to refinance their home loans. Lower rates will allow them to save a tremendous amount of money over the life of the loans. However, it is important for homeowners to understand that they should expect to pay the lenders any standard closing costs associated with the new loans, including service fees, points, title insurance protection, and any other miscellaneous expenses.

Why do homeowners need to purchase new title insurance policies on refinancing loans when they have already done so with their original purchases? To a lender, a refinance loan is no different than a purchase money loan in terms of title insurance. The lender's priority on a refinance loan is to ensure that the new loan is protected, just as the original lender required. As such, when homeowners refinance their homes, they are buying title policies to protect the lenders. Why do lenders need title insurance? Once a lender generates a loan, it typically sells that loan to secondary market investors, such as FannieMae or FreddieMac.

In order to make the sale to secondary markets, title insurance protection is required so that the secondary agencies can see that their security interest in the loan is protected with no clouds on the title. Those lenders who keep loans in their portfolios also request title policies in order to protect their investments against any title-related defects that could have cropped up since the origination of the loans.

What type of situations warrant that a lender must require a new title insurance policy? Regardless of whether six months or six years have passed since an original purchase or prior refinance, a myriad of title defects could have occurred. Perhaps a new second trust deed was taken out on the home. Have mechanics liens been placed on the property due to unpaid wages for a remodel done on the home? Child support liens or judgment liens could also be factors. These types of situations are more common than one might think. The only way for a lender to adequately protect itself against any number of title defects is to require that a new lender's title policy be purchased with each new loan origination. When homeowners purchase their homes, don't they have to buy a lender's title policy? With the California Residential Real Estate Purchase Contact, payment of title insurance coverage is a negotiable item between the Buyer and Seller.

Regardless of who pays for the lender's policy, however, new title insurance coverage is required by the lender. The lender's policy will remain in force only during the life of the loan that was insured. Once a homeowner refinances, the old loan is paid off and a new loan is issued for which the lender will require a new title insurance policy. Is a lender's title policy the same as a homeowner's title policy? When a homeowner buys a home, he/she purchases a homeowner's title policy. The homeowner's policy stays in force as long as he or she owns the home.

When the homeowner refinances, the lender will often require him/her to purchase a new lender's policy to protect its new security interest in the property. So in a refinance scenario, a homeowner is buying a policy to protect the lender. A new homeowner's title policy is not necessary in that case. Are there any discounts available for title insurance on a refinance transaction? Discounts may be available. Be sure to check with your title representative to learn how you can save money on a refinance.



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