A good question! When you bought your property, if you are like most owners, you took out a mortgage. As part of that process you bought both ‘Owner’s Title Insurance’ and ‘Lender’s Title Insurance’. Let us say you do not have a long-term fixed interest rate mortgage, and you decide to take advantage of the currently-low mortgage rates. Or, you have a lot of equity in your home that you want to release, so you decide to refinance. You have two choices – shop around for a new lender or stay with your present lender. Whichever way you go you are expected to pay for a new Lender’s Title Insurance Policy. The importance of title insurance when refinancing can be summed up in two words – ‘critically important’.
What is Title Insurance For?
Let us remind ourselves of what title insurance does. It protects the owner (Owner’s policy) and it protects the lender (Lender’s policy) against any defect in title – the right to own the property. When you buy property the title agent carries out a detailed search to make sure there are no hidden problems that could affect ownership. It is unlikely – but it’s possible – that, for example, a previous owner forged someone’s signature in a previous sale. The person whose signature was forged could appear and reclaim ownership. If this were to happen, the owner’s title insurance would kick in and defend you, the current owner, and the lender’s title policy would defend the lender against losing the property – or, at least, make sure you are both fully compensated if you did lose it.
This is most unlikely, and it is only one example, but it serves to explain the general importance of title insurance.
What About When You Refinance?
Two things, firstly if you are the owner, your Owner’s policy stays intact while ever you own it, so you do not need a new owner’s policy. But that does not hold true for the lender.
When you refinance, you effectively pay off the old loan and take out a new one. As soon as that loan is paid off, the lender’s policy ceases to exist. The lender – even if you go to the same lender as before – now needs the new loan to be protected for the same reasons as the original loan was (in case something like the example, above, occurs.)
On top of that, though, there are other possible problems the lender needs to be protected against. Here is another example. Let us say that while you owned the property you had major work done and did not pay the building contractor. You and the contractor fail to agree, so he takes out what’s called a mechanic’s lien against the property. Or, let’s say, you do pay your contractor but he does not pay for the materials he used, so the supplier comes to you for payment. You already paid your contractor and refuse to pay, again, for materials. This legal dispute could escalate to a point where you lose the property. That would give your lender a serious problem, so to protect the lender, they require a new Lender’s Title Policy.
Another, and more likely reason, you need a new lender’s policy is this. Once the refi has closed, the lender will probably sell your loan on what is called the secondary market. Your loan will be bundled with other new loans and sold as a package called a mortgage-backed security. The only way that package will be bought is if all the loans within it are secure. The only security that will be accepted is – you guessed it – a current lender’s title insurance policy.
So, to refi you must provide a new lender’s title insurance policy. If you are a property owner and you are considering refinancing – or even buying another property – a title search will have to be done before you close. If you are a real estate professional and you want to make sure all of your clients are properly taken care of with all of the title work completed as required – especially with the new TRID rules coming into force – so the closing goes smoothly, please feel free to contact us by clicking here. We will be happy to answer any questions you may have and to accept all new title orders you need to raise.