The settlement agent orders a title report, sometimes referred to as a title search or title abstract, from a title company. In certain states, including in the South and Northeast, the title abstract is prepared by a real estate attorney. In short, the title report confirms the property lines, type, ownership, zoning and any easements for the property you are refinancing. An easement is a right to use the property by a third party, typically involving a local utility company.
A title company or attorney examines county records to determine the legal ownership of the property. Additionally, the title report identifies exceptions to title, or items that are not covered by the title insurance policy the title company issues. Exceptions to title include any easements or outstanding liens against the property such as pending or past due property taxes. Existing mortgages on a property are permitted exceptions because they are paid off when the property is refinanced and your existing the lender releases the lien.
The title report makes sure that there are no current liens against the property, such as an outstanding property tax bill or ownership dispute that could interfere with your refinancing. All of this information is included in the title report (or title search or abstract) provided to you by the title company or attorney. A clear title report indicates that the property is free of all liens and clears the way for closing your refinancing.
A clear title report also clears the way for title insurance to be issued. Title insurance protects the policy holder in the rare event that there are defects or errors in the propertyâ€™s title and a party makes a claim against the property at some point in the future. For example, after the refinance closes a third party could claim an easement that could undermine the property value.
So basically the title report (or title search or abstract) should make sure that there are no ownership or lien issues associated with the property when the refinance closes, but you have title insurance to protect you in case issues arise in the future. Title insurance pays the policy holder for the financial loss attributable to the resolution of any property title issues.
Unlike the title report (or title search or abstract) which may be provided by a real estate attorney in some states, title insurance is always provided by a licensed title insurance company. Title insurance companies are licensed at the state level and must meet regulatory and capital requirements to ensure they can pay for potential policy claims.
For a refinance, the owner is not required to purchase a new owner's title insurance policy as the original owner's policy is valid until you sell the property. The borrower, however, is required to purchase a new title insurance policy for the lender. It may seem redundant (and annoying) that you have to pay for a new lender's title insurance policy when you refinance a property that you already own but lenders require it in case there have been any changes to the property title since you purchased it, such as an unpaid property tax bill. The cost of title insurance for the lender may be included in a single fee that also includes the cost of preparing the title report, or the title insurance policy may be broken out as a separate cost item, sometimes referred to as a "title insurance binder."
Title insurance premiums are determined by state regulators so title insurance companies in a given state should offer similar rates. Title insurance rates typically vary by property value with the higher the property value the higher the insurance premium. Title report and insurance fees for most mortgages typically cost $400 - $800.
Some title companies also have in-house escrow / settlement agent departments that provide mortgage settlement services but fees for settlement services should be listed separately on mortgage disclosure forms such as the Loan Estimate, Closing Disclosure and Lender Fees Worksheet. Additionally, in cases where a real estate attorney is used to prepare the title abstract the attorney typically also serves as the settlement agent for the mortgage so the fee is greater. Please note that although title insurance rates are determined at the state level, closing procedures, settlement agent costs and attorney costs (if applicable) vary by city.
Similar to selecting the settlement agent, the choice of title company or attorney in a refinancing is typically made by the lender although technically the borrower has the right to make the selection.
"B7-2-03, General Title Insurance Coverage." Selling Guide: Fannie Mae Single Family. Fannie Mae, March 31 2015. Web.