Any discussion on what title insurance does for you must first be focused on what it does not do. When you get a mortgage loan to purchase a home, your lender is going to require you to get lender's title insurance for the amount of the mortgage loan. You will also be required to pay for the lender's title insurance coverage, which is a way in which the lender protects the investment that it is making by lending you the money.
If you only get lender's insurance, any equity that you may have in the home will not be covered if any problems should arise with the title to the home. It would stand to reason that the title is free and clear if the insurer has issued coverage. However, that is not always the case because not title search offers a 100% certainty.
The problem is that there could have been human error, fraud, forgery or some other problem with the title. In order to protect yourself and your investment, you should get owner's title insurance, which is not much above what you will be paying for the lender's insurance.
What title insurance does is that it protects you in case there are any liens, real estate tax problems, or any other encumbrances on the property that may later come up. You have to keep in mind that the property you are going to purchase may have changed hands several times, and that land that it is on will probably have changed hands even more times.
The insurance takes effect on the date that it was issued, and it works back in time, covering any issues with the title. If you fail to pay your real estate taxes, and if there is a tax lien placed on the house, title insurance will cover the issue because it occurred after insurance was issued. This is an important manner in which title insurance differs from other types of insurance, and something that you need to keep in mind.
Another thing to keep in mind is that lender's title insurance will offer coverage as long as you are paying off your mortgage. If you get owner's insurance, it will offer coverage as long as you or your heirs have a stake in the property. Once the property is sold, the new owners will be required to get title insurance. If you decide to refinance the property, even if you refinance with the same lender, you will be required to get title insurance.
The lender will require you to get title insurance if you refinance because the lender does not know whether any problems have arisen since you took out the mortgage on your home. This highlights the importance of having this type of insurance.
You never know when something like a forged signature is going to pop up to cause problems with the title, so it is better to have coverage than for your investment to be at risk. The whole point of having this type of insurance in the first place is to cover the high investment that you are going to make in purchasing real estate.
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