October 24, 1997

Should you increase your title insurance coverage?

By TOM KELLY
The Real Estate Advisor

One of the biggest gripes heard at refinance time comes from the loan applicant who has to pay for title insurance all over again. Homeowners often resent the costs, especially if they simply want to reduce their interest rate.

But when should an owner be eager to increase title insurance coverage?

"The need for increased coverage should be limited to those people who buy land and then develop it later or those who have seen significant appreciation," said Dwight Bickel, in-house counsel for Transnation Title Insurance Company. "The value of the policy should be the value of the property should you face a loss."

A good example is the Seattle woman who bought land for $40,000 a few months ago and recently built a $60,000 structure on the land. Her title company suggested she increase the value of her coverage because it was written only for the value of the land. She wasn't really eager to pay the additional premium on top of her monthly mortgage payment and recent landscaping bills.

"It's a good idea to pay for the additional coverage," Bickel said. "If you don't, you are simply putting more value at risk. And even though her cash value in the property is $100,000, the policy should be written for the fair-market value which could conceivably be much greater."

Bickel also said that boundary disputes are common on rural, unplatted land where legal descriptions appear in metes and bounds instead of more specific plats or blocks. So, if you are buying land in the country it's a good idea to spend a little more for an extended-coverage policy. Standard coverage insures who owns the title; extended coverage insures the location of the boundary lines.

A new title policy must be done each time a property is sold, or refinanced, even if an identical search has been done within a few months. This is to ensure that no new liens, such as a home equity loan, have been placed against the property.

This cost sometimes infuriates refinancers who have no new liens and view the charges as repetitive, although reduced rates are typically available for policies reissued within three years. In addition, the cost is based on the price of the property, not on the risk involved. So when a new appraisal reflects an increase in market value, the cost of title insurance will rise.

"It's often difficult for the public to understand that you are not being insured against new risks when an updated policy is issued," Bickel said. "Potential claims predate the policy. The updated policy, or owner's renewal policy, simply increases the limit of money you would receive should you suffer a loss.

"A new policy, however, would also cover any claims between the time the original policy was issued and the new policy was issued. This would not include any mechanics liens (construction liens) while the current owner was building a house."

An owner's policy indemnifies (protects) the purchaser of the property and is usually paid for by the seller at closing. That's because the seller, in paying for the policy, is actually proving he owns the property and has the right to sell it.

The lender's policy indemnifies the lender and is usually paid for by the purchaser who borrows money to buy the property. The lender's policy is a more expensive and extensive form of coverage because it includes what a correct survey would show if the property were surveyed prior to closing. Most lenders require this extended coverage because most loans sold in the secondary mortgage market must have this type of protection.

The title company conducts a search of court and public records before a house is sold to establish that the seller actually owns the property and that it is free of legal claims that could cloud the buyer's title.

The title company must disclose whether the owner has paid off the mortgages and any other claims against the property, such as property taxes. The company then issues a contract, or policy, protecting the owner and lender from a loss arising out of defects in or challenges to the property.

If the value of your property has greatly increased because of improvements you've made, it would be a good idea to check the value of your title insurance policy.

"If you are refinancing merely to reduce your interest rate and the difference in the value of the home doesn't change that much, it may not be necessary to increase your owner's coverage," said Alan Tonnon, real estate attorney and charter member of the Washington Real Estate Commission. "The bank will require a new policy, and you have no choice there. But if the value changes significantly, you should increase your owner's coverage. There is always the possibility there will be a problem with the title."

For example, let's say you are refinancing a home with an current appraised value of $200,000. You paid off some school bills, credit cards and a trip to visit Mom and now have a new first mortgage of $180,000. The discounted refinance title insurance fee you would have to pay to cover the lender's $180,000 interest in the property would be about $365, about half the normal rate.

A new appraisal is used to determine fair-market value of the property, thereby dictating the amount of title insurance if you choose to increase your owner's coverage. The amount of the loan dictates the amount of title insurance the lender will require.

If your home has appreciated, protect it with additional coverage -- which will included those dreaded costs of title insurance.

Previous columns:

• As interest rates dip, refinancing options abound, 10-10-1997
• Feds clean up Fair Credit Reporting Act, 10-03-1997
• JLS being 'proactive' with Costco deal, 09-26-1997
• Home businesses are changing our homes, 09-19-1997
• Area housing market: how hot is it?, 09-12-1997
• First-time buyers need creativity, 09-05-1997
• Don't expect mortgage rates to move much, 08-15-1997
• How wired will real estate get?, 08-08-1997