Why is title insurance so expensive when I refinance my mortgage?

Dear Liz,

I would like to refinance my mortgage but I was shocked when I got a Good Faith Estimate from a lender. Is it my imagination or are the costs a lot more than they were when I bought my home?

Roger, Alabama

Dear Roger,

It is probably not your imagination -- the costs of a mortgage refinance can be higher than a purchase mortgage for several reasons. First, when you bought your home, the seller probably split many of the costs with you. In most parts of the country, it's customary for home sellers to pick up some or most of the fees for title insurance and escrow services as well as transfer taxes and recording fees. In fact, if you financed your purchase with an FHA mortgage, it is required by law that you do not pay some of these fees when buying a home.

Title insurance: A necessary evil

Title charges comprise some of the biggest fees involved in a home loan refinance. Lenders require title insurance as a condition of funding your loan. Two types of policies are available: an owner's policy and a lender's policy. The lender's policy insures that the lender's security interest in the property has priority over claims that others may place on your property. The lender's policy does NOT protect you. Title insurance guarantees against losses from any defects in title that may exist in the public records at the time you purchase or refinance your property, and certain other risks described in the title insurance policy. Possible title defects include:

• Errors or omissions in deeds
• Mistakes in examining records
• Forgery
• Undisclosed heirs
• Missing heirs
• Liens for unpaid taxes
• Liens by contractors

Before issuing a title insurance policy, title companies check for defects in your title by examining public records including deeds, mortgages, wills, divorce decrees, court judgments, tax records, liens, encumbrances, and maps. The title search determines who owns the property, what outstanding debts are against it, and the condition of the title.

You CAN save on title insurance

When you compare mortgage quotes and talk with refinance mortgage lenders, they are usually just guessing what the title insurance costs will be and they may get them from a chart provided by an insurer that they work with. However, if the property was purchased or refinanced within the last five years, you qualify for what is called a short-term or reissue rate. These discounted rates vary from state to state but range from 5% to 60% off the standard insurance rate. Who wouldn't want to pay $600 instead of $1,200 for the same coverage?

Your lender may get a reissue rate quote when completing its disclosures or it may not. That this rate exists is not widely known among the general public, and if you don't ask, you don't get. Industry insiders agree -- there is little incentive for title officers to mention reissue rates because the commission on this discounted policy is much smaller. So it's up to you to shop with several companies, ask about reissue rates, and find out exactly what you need to do to qualify for them. the savings can be significant, and can really lower the break-even period on your mortgage refinance and increase your savings.