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What is title insurance, and why do I need it?

The payment covers you against third party claims on the unit or outstanding liens once you close.

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One of the closing costs you may need to pay on a condo or townhouse purchase in New York City is title insurance. Think of it as paying for is the peace of mind that no one else can "come in and lay claim" to your place, says Ami Rosen, mortgage banker with Wells Fargo

Title insurance isn't a legal requirement but it may be a closing requirement if a buyer is taking out a mortgage for a unit in New York City, although it won't apply to co-ops because of their unique shareholder structure. 

In many cases, you won't be able to close a condo or townhouse deal without making the one-time title insurance payment. If you have financing in place to buy the apartment, your lender also needs title insurance. And if you refinance, you have to buy it again because your new lender needs the same reassurances.

What does title insurance cover?

The payment covers you if you close the deal and then find there are outstanding liens on the apartment or any issues arising from former owners or open permits. Rosen says after a purchase has closed, title insurance companies incur the costs and take on the responsibility of resolving these issues but they cover themselves from this ever happening by not insuring a property until all the title problems have been fixed. 

Do different companies offer different rates?

Title insurance isn't generally something buyers shop around for.

"The rates are the rates, which are a percentage of the loan amount," says Rosen. Real estate attorneys often have title companies they can recommend based on their experience, but buyers are free to choose the title company if they have a preference, says Lauren T. Piechocki, a real estate attorney with Braverman Greenspun

"The attorney will generally do the heavy lifting and work with the title company on the buyer’s behalf as part of the closing process," she says.

How much does title insurance cost? 

You should budget on spending at least a few thousand dollars on title insurance, says Piechocki. "Of course, the higher the purchase price, the higher the premium." 

Rosen says the cost will also vary depending on whether you are purchasing or refinancing, but "you should budget a little under 1 percent of the purchase price." He adds, "it’s more about the fee that they are charging for couriers and wire transfers." 

What other issues might there be? 

Title insurance is intended to protect buyers if there's a claim against their title, but Piechocki says you should be aware of potential exceptions to coverage.  It can sometimes have exclusions. For example, if the seller does not pay off their existing mortgage at or before a closing, the title company may not protect you from a claim by the seller’s lender.

When it comes to co-ops, instead of title insurance, you'd do a search to clear up any issues related to liens, or open permits.