It depends upon your tolerance for risk. When you purchase a property you are handed title to the property in the form of the deed. Someone, other than the owner, may have rights in the property that are not evident. There could be liens on the property (like a mortgage, tax or contractor’s lien), or a zoning violation or encroachment. Maybe there is an easement for utilities that never got recorded or a disgruntled lurking relative of a previous owner that might come out of the woodwork to lay a claim to the property, or some portion of it, as theirs. In simple terms, title insurance protects you against future claims against the property and it will pay the legal costs and fees to defend against such claims.
There are primarily two kinds of title insurance. If you are getting a mortgage to buy the property, your lender will require you to buy title insurance on the amount of money they are lending to you. This is called the lender’s title insurance policy; the current cost is approximately $175. As you pay down your mortgage, the lender’s exposure to title issues diminishes and your exposure increases. The second kind of title insurance is called owner’s title insurance and it covers your equity in the property (the difference between the mortgage and what you are paying for the property). The current cost of owner’s title insurance for up to $1 million is $3.65 per $1,000, or $3,650 for $1 million. The rate drops as the value rises. The coverage of the policy is not necessarily limited to the face amount of the policy or the value of the property. You may want to consider, for a relatively small amount of money, purchasing an inflation rider that will increase the value of your coverage as the value of the property increases over time.
Before agreeing to mortgage the property, the lender hires a qualified third party to do a thorough title search, researching the history of the ownership of the property. They need to confirm that there are no issues with the title in order to make sure that it is a good risk for them. The title search shows not only limitations on the use of the property and rights that others may have in the property, but also liens or monetary obligations that are outstanding against the property. By minimizing the risks of claims being made the title insurance company is able to offer its insurance policies for a relatively low, one-time fee. All of which the buyer pays for in closing expenses. And yet another good reason to work with a local attorney who is informed about these issues. Title insurance is a relatively low cost, one-time effective hedge against future issues with the property.