Title
insurance is a policy that is usually issued by a title company to
protect the lender against something that might have happened in the
past, rather than something that might occur in the future. In essence,
an extensive search of public records is conducted by the title company
to validate who has held title to the property in the past. The lender
wants to know if there are any liens, judgments or easements on the
property that they should be aware of.But title insurance also guards against hidden risks or unknown factors that might cause an encumbrance at some point in the future, such as unknown heirs, forged deeds or wills, misinterpreted wills, false impersonation of the true owner of the property, deeds signed over by persons of unsound mind, or defects in the recording of past titles. Title insurance covers the cost of the title search, and any legal fees that may result from any dispute over past property ownership. It is required by the lender and paid for by the buyer.
The smart home buyer will also purchase title insurance to protect their own interests. This is a one-time premium that protects the buyer or their heirs, as long as they retain an interest in the property.
Private Mortgage Insurance (PMI) is required by most lenders when a
borrower puts less than 20% down on a purchase loan. Paid for by the
borrower, PMI not only protects the lender from foreclosure, it also
enables many buyers to qualify for loans and purchase real estate when
they couldn't have otherwise. On January 1, 2007, legislation went into
effect making PMI tax deductible for new borrowers whose personal
adjusted gross income is $100,000 or less. This has created additional
opportunities for many buyers to finance a more expensive home or, in
some cases, to obtain a lower monthly payment, while reducing annual
income taxes.