If you've ever bought a home, you're familiar with paying thousands of dollars for those amorphous, ambiguous expenses known collectively as "closing costs." Nestled among those escrow fees, taxes, points, and pedicures is something called "title insurance." If you ask your broker or agent why you're shelling out hundreds (if not thousands) of dollars for this, the reply will be something like, "This covers you in case the person selling the home doesn't really own it."
A house isn't like a stereo, which can be easily stolen and sold at the local pawnshop. How could a ne'er-do-well sell someone else's house? That's crazy!
Actually, it's not so crazy, though the problems are rarely about illegitimate owners (though that happens). Title insurance kicks in when a family member (e.g., an ex-spouse) or previous owner has a legal claim to the property. Also, the insurance may cover situations where someone has placed a lien on the house, perhaps a contractor who was never paid by the previous owner.
That said, claims are rare. Title insurers pay out just $0.05 to $0.10 in claims for every dollar of premiums they receive. One reason is that most of the problems of ownership come up during a title search, before the deal is done. Also, because most home buyers don't look for the best deal on title insurance -- after all, it seems like a paltry cost compared to a mortgage worth hundreds of thousands of dollars -- insurers charge high premiums and reap big profits.
Furthermore, title insurance generally protects the mortgage company, not the homeowner -- even though it's the homeowner that pays for it.
The good news is a little work can get you a better deal. A few phone calls can save you hundreds of dollars (unless you live in one of a handful of states that set title insurance prices). Make sure you ask about any additional costs that might come along with the insurance, such as escrow fees.
And if you're refinancing your mortgage, check with the company that issued your original policy and see if you'll be able to save some money by getting a "reissue rate."