Title insurance: It’s another one of those mysterious fees buried inside the pile of paperwork you'll receive at your loan closing. Who knows what it's all about? All you've figured out is that lenders require a policy for their protection, and either you or the seller will have to pay for it — and then you’ll be asked if you want an owner’s title policy, too.

Here's how title insurance works, how to decide whether you need your own policy, and how much you can expect to pay.

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What is title insurance?

Title insurance protects the insured from a financial loss related to the ownership of a property. There are two policies in the mix at a home loan closing: the lender’s policy, which is required, and an optional owner’s policy. Both are a one-time, upfront cost — not a monthly premium that will be added to your mortgage payment.

When you're in the process of buying a home, a title research company will check the property's ownership history. Ideally, your new home has what's called a “clear title.” That means the current owner, who is selling to you, has a complete ownership stake in the property, without any legal claims against it. Claims can be in the form of a lien or levy from a lender, creditor or — in the event of taxes due — the government.

If the research company doesn't find any outstanding claims or title defects, why buy title insurance? Because an as-yet-undiscovered issue could cloud the ownership of the property years after the purchase. That could be a mistake in the ownership history, an oversight committed by the title researcher, even a previously unknown heir. Maybe there's a pending lawsuit or legal judgment. A title issue could also arise as a matter of fraud.

A title defect that arises after a loan closing could, at the very least, mean a variety of legal costs — and, in a worst-case event, the loss of your property and the money you’ve put in it.

Lenders insist on title insurance to protect their interest in the loan. And that makes sense, because they're on the hook for the majority of the home's value, especially in the early years of the mortgage.

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Do you need owner’s title insurance?

Can you make a case against buying the owner’s title insurance policy? Sure. But let’s think this all the way through before making a decision.

“Here’s the deal: When you buy a house or build a property, usually you get a warranty deed,” says Martin Farris, a mortgage broker in San Angelo, Texas. “That means the seller is saying, 'This is a good deed. I own this property free and clear. I'm transferring it to you free of any other liens.’"

So any ownership defect would be the seller's responsibility, right? And as a buyer, you’re in the clear — any legal action would be against the seller. But remember, the seller has transferred that risk to the insurance company. And even though the lender is protected by the title policy, your stake in the home could be at risk. That would be equal to your down payment and any equity you have. Again, a title claim could happen many years after your purchase.

For many home buyers, purchasing an owner’s title insurance policy is a matter of being safe rather than sorry.

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How much does title insurance cost?

A lender’s title insurance policy is a given, and maybe now you think an owner’s policy isn't a bad idea. How much will it cost to buy both?

Sometimes nothing. You might be able to negotiate to have the seller pay for both policies.

But if you end up shouldering the cost, your policy might not cost much. "When you buy two title policies in Texas, the first one you buy at full price. The second one you buy and they charge you a hundred bucks for it," Farris says. It’s a discount called the “simultaneous issue rate" — kind of a “BOGO” thing.

Prices and discounts vary from state to state. You can expect to pay somewhere between $1,000 and $4,000 for title insurance, according to CourtHouseDirect.com, a courthouse data research website.

Some states regulate insurance rates, so there may not be much cost difference among insurers, such as in Texas. But in other locations, title insurance is one more closing cost that you can shop for.

The American Land Title Association provides a list of insurers by state and city. There are also title insurance providers online, such as EntitleDirect.com.

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