Closing costs really add up when you purchase a home. Even with the VA loan, which usually has lower closing costs, you can pay thousands of dollars. When you refinance, then, do you have to pay the same closing costs? In particular, do you have to pay title insurance again? It seems like an unnecessary purchase, especially when the insurance can cost you several thousand dollars. Unfortunately, even with the VA streamline loan, you must pay for title insurance again.
What is Title Insurance?
There are two types of title insurance – owner’s policies and lender’s policies. Owner’s title insurance covers you, the owner. It covers the equity you have in the home. In other words, it protects your investment. If you owe $150,000 on a $200,000 home, you have $50,000 in equity. The title insurance protects it. Of course, it does not protect you from natural loss due to a declining house value. What it does protect against is claims against ownership or lawsuits. Owner’s policies last for the entire time you own the home – you do not have to purchase it again, even if you refinance.
Lender’s insurance, on the other hand, protects the lender’s investment. It gives the lender reassurance that no one will come in and stake a higher claim to your home. The lender has a lot invested in your property, so they have a lot at stake here. The lender’s policy you purchase is only good for the time you have the loan though. If you pay it off, whether with your own money or with a refinance, the policy is no longer in effect.
Purchasing New Title Insurance
When you refinance with the VA Streamline, you must purchase new title insurance. This is in an effort to protect the lender. Because the title insurance you purchased originally was specifically for that loan, it does not matter if you use the same lender or a different one – you need a new title policy.
Sometimes, you can get lucky and get a discounted rate for the new title insurance. This is the case when you use the same title agent. Because they performed the original search, they will not have to go back very far to determine if there are any liens on your property. They will only have to concern themselves with the time you purchased the home and moving forward. A new title agent, however, will likely complete a full title search to make sure there are no liens dating from before you purchased the home.
If you use the same title agent, you may get what is called a reissue rate. This is basically a discounted title insurance rate. The discount you receive depends on a variety of factors including how long you have owned the home and how much you owe. Title insurance is based on the loan amount, so the less you owe on the home, the less insurance you must purchase.
Does it Pay to Refinance with the VA Streamline?
Now you may wonder, should you refinance with the VA streamline loan? If you have to pay title insurance again, you could be looking at several thousand dollars. Is it worth it? There are a few ways to tell.
Start by determining how much you will save each month. Will you secure a lower interest rate? This is usually a requirement of the VA IRRRL program unless you refinance from an ARM to a fixed rate. Take your current mortgage payment and subtract the new payment from it. This is your savings. Knowing how much you will save will help you figure out if refinancing is worth it.
Next, figure out how much the closing costs will be. Make sure you know about each cost, including title insurance, closing fees, underwriting, processing, and any other lender fees. Once you have that total, you can determine your break-even point.
Take your total closing costs and divide them by the total monthly savings. For example, if your total closing costs equal $2,500 and you will save $150 each month, it would look like this:
$2,500/$150 = 16.67 months
This means it would take you 16.67 or 17 months to break even on your refinance. If you think you will move before 17 months pass, it is not worth refinancing and paying the closing costs again. On the other hand, if you think you will stay in the home longer than the 17 months, it makes sense to pay for the refinance.
Of course, this is a personal decision. You may decide that if you will only save for a few months or even a few years, it is not worth it to you. Other people prefer to save every dime no matter how long they think they will stay in the home.
Closing Costs Help You
It might seem frustrating to pay closing costs again, especially title insurance, but they help you. Without the closing costs, banks and closing agents would not be profitable. They would not be able to provide loans then. This means you would be stuck with the same loan until you pay it off. This is not a good reality for many people. Refinancing helps many borrowers get ahead on their mortgage and pay their home off faster. It also helps borrowers tap into their equity and get their money when they need it.
Title insurance protects the lender even with a VA streamline loan. Although The Streamline program does not require very many things, title insurance is not one of them. Consider all of the other benefits of this loan program and the little documentation you must provide. Letting the lender protect themselves against lawsuits or losing their lien position is a small price to pay for such a great benefit.