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Why Lenders Require Title Insurance When Refinancing Your Loan


Lower interest rates have motivated you to refinance your home loan. The lower rate may save you a tremendous amount of money over the life of the loan, but you should also expect to pay the lender the typical closing costs associated with any new loan, including service fees, points, title insurance protection and other expenses.


Q Why do I need to purchase a new title insurance policy on a refinanced loan?


A To the lender, a refinance loan is no different than any other home loan. So, your lender will want to insure that their new loan is protected by title insurance, just as the original lender required. Therefore, when you refinance you are buying a title policy to protect your lender.


Q Why does a Lender need title insurance?

A Most lenders generate loans and then immediately sell those loans to secondary market investors, such as FannieMae. FannieMae, in order to protect its security interest in the loan, requires title insurance coverage. Even those lenders who keep original loans in their portfolio are wise to get a lenders policy to protect their investment against title related defects.


Q When I purchased my home, didnít I also buy a lenderís policy?


A Perhaps. Who pays for the lenderís policy on a purchase loan varies regionally and by the terms of individual contracts. However, even if you did buy a lenderís policy when you purchased your home, the lenderís policy remains in force only during the life of the loan that was insured. If you refinance, the old loan is paid off ( the "life" of the loan expires) and a new loan is issued for with the lender will require a new title insurance policy.


Q What about my original title insurance policy?


A When you bought your home, you purchased a homeowners title policy. The homeownersí policy stays in force as long as you or your heirs own the home. When you refinance, your lender will often require that you purchase a new lenderís policy to protect their new security interest in the property. Thus, you are buying a policy to protect your lender, not a new homeownerís policy.


Q What could possibly have happened since I purchased my home which warrants a new lenderís policy?


A Since the time that the original loan was made, you may have taken out a second trust deed on the house or had mechanicís liens, child support liens or legal judgments recorded against you Ė events that could result in serious financial losses to an unprotected lender. Regardless if it has been only 6 months or less since you purchased or refinanced your home, a myriad of title defects could have occurred. While you may not have any title defects, many homeowners do. The only way for a lender to adequately protect itself is to get a new lenderís policy each time you purchase or refinance your home.


Q Are there any discounts available for title insurance on a refinance transaction?


A Yes. Title companies offer a refinance transaction discount or a short term rate. Discounts may also be available if you use the same lender for your refinance loan and your original loan. Be sure to ask your title company how they can save you money.

California Land Title Association
Copyright © 2000. All rights reserved.
Revised:  June, 2000

This article was published by the California Land Title Association. Member companies of the California Land Title Association are dedicated to facilitating the transfer of real property throughout California and increasing the public's awareness of the value and purpose of title insurance.

Content provided to by the California Land Title Association. The California Land Title Association encourages readers with questions to contact any of its member Title companies for assistance.


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