Are title insurance and mortgage insurance the same thing?

Answer 1

Title insurance and mortgage insurance are NOT the same.

Title insurance policies are written to cover a specific tract of land and can be offered to either the mortgage lender (called a lender's policy) or the purchaser of the property (called an owner's policy) and is usually paid out of closing costs. Title insurance protects against any hidden defects in the title to the property that would not be disclosed by a search of the public records, such defects including, but not limited to, a forgery of an earlier transfer document, a missing heir of a previous owner suddenly appearing to claim an interest, or human error in indexing the records. Most mortgage lenders will require a title insurance policy and will pass the cost on the their borrower. Owner's policies are usually optional but highly recommended, as they usually require only a very low one-time payment and can prevent potential attorneys fees and other costs, in a dollar amount up to the purchase price of the property. The insurance policy will protect an insured owner for life, even after he or she moves away from the property.

Mortgage insurance policies are written to cover a specific loan solely to protect a mortgage lender. Mortgage insurance is meant to protect the lender in the case the borrower defaults and does not make his/her payments, so that the lender must foreclose. This policy is most often required when the borrower does not have enough "ownership" in the value of the house relative to the loan amount. (The typical requirement is at least 80% equity, which for a buyer translates to a 20% or higher down payment.) It allows a buyer (in the case of a loan made to purchase property) who normally would not have enough cash for a down payment, or an owner (in the case of a loan made to refinance property) who does not yet have enough equity in the home to still obtain a loan. The conventional belief of financial institutions is the less a borrower feels he has invested in the house, the more likely he is to "walk away." The mortgage insurance is meant to make up the difference in the debt-to-equity ratio. It, too, is a cost passed along to the borrower, but as part of the monthly mortgage payment. With loans insured by the Federal Housing Administration (FHA) program, an up-front mortgage insurance payment will also be required, usually about 3% of the loan amount, paid at closing. Federal law allows the insurance to be cancelled, as it is no longer deemed necessary, once the borrower gets enough equity in the property over time, as he makes payments toward the principal balance of the loan.