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Why Buy an Owner's Title Insurance Policy?

The purchase of real estate frequently involves a considerable financial investment, and buyers are often looking for ways to save money on the transaction. This can bring up the question of why add the expense of an owner’s title insurance policy (“OP”). That question leads to the issue of what title insurance is and what protection it provides to the buyer of real property.

In the typical residential transaction, a buyer’s lender will require the buyer to purchase a mortgage policy (“MP”) for the benefit of the lender. Although title insurance premiums are one-time premiums (for the life of the mortgage or ownership), often a buyer is of the opinion that since s/he purchased an MP for the lender there is no need to expend extra money for an owner’s policy. But this is a decision that ultimately may be “penny wise and pound foolish.”

Here’s the reason: A mortgage policy insures the lender that its mortgage is a valid first lien on the property. If it is determined that, indeed, there is a claim that is prior to the lender’s mortgage, then the title insurance company is required to either fix the problem or, if the problem is unable to be fixed, to pay the lender an amount of money up to the unpaid balance of the mortgage. Therefore, if there is a complete bust in title (meaning the buyer ends up not owning title to the real estate), then the lender is made whole and suffers no financial loss because, under the MP, the insurance company is obligated to satisfy, or pay, the mortgage in full.

In the same situation, if an owner’s policy has been issued, the buyer will be paid an amount up to the face amount of his/her policy, that policy amount being the amount of the purchase price of the real estate. [The amount paid to the buyer/ owner will be decreased by the amount paid to the lender under the MP. So what this means is that the OP actually insures a buyer’s equity in the property.] Without an OP, a lender will be made whole; however, the buyer will lose not only the property, but also all of his/her equity in the property.

Regarding the cost of title insurance, here is how the premium amount is determined: Both the OP and the MP premiums are computed based on the amounts of the sales price and the mortgage, respectively. When an OP is purchased at the same time as an MP, however, payment of two full premiums is not required. In fact, the simultaneously issued MP is issued for a relatively low flat rate. With Oklahoma Title & Escrow Corporation (“OTEC”) that MP is only $150. So the total cost (all of which is typically an owner/buyer expense) for both an OP and an MP is the OP premium plus the minimal simultaneously issued MP premium.

In summary, for a relatively small financial investment, a buyer of real estate can be fully covered for the value of his/her property. A wise buyer should always inquire of the company offering title insurance how much the premiums would be if only an MP were issued compared to the cost for both an OP and a simultaneously issued MP. By asking for this comparison, the buyer can determine if it makes economic sense to purchase the owner’s policy.

Title insurance is like all insurance. It is worthless unless and until you need it. But once you need it, it is worth everything you paid for it and more.

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