Buying and owning a house always involves some risk, but fortunately, there are several types of insurance policies that can help you mitigate those risks.

You likely know of homeowners insurance , which protects your residence and belongings in case of a burglary, adverse weather event, or other covered scenario. You've also probably heard of mortgage insurance , which protects your lender if you fail to repay your home loan as agreed upon.

A lesser-known insurance policy involved in homebuying is title insurance. Its protections concern the legal ownership of your home, and it's an important policy to have in place if you want to safeguard your investment.

Are you buying a home and want to ensure your interests are fully protected? Here's how title insurance can help.

In this article:

• What is title insurance?

• How title insurance works

• What title insurance covers

• What title insurance costs

• FAQs

What is title insurance?

Before we discuss title insurance, it's important to understand what a "title" is in terms of homeownership.

"A title in real estate references the legal ownership of a property," said Scott Kuhn, head of retail mortgage sales at Members 1st Federal Credit Union, via email. "It details who owns and has a legal right to own the property."

Title insurance is designed to protect this legal title against third-party claims to your property after you take ownership.

For example, the coverage can protect you if an overlooked heir to a former owner tries to claim the property many years after you've moved in. It can also keep a contractor from claiming the home due to an unpaid repair invoice.

Learn more: How to get a mortgage

Types of title insurance

There are two types of title insurance: lender's title insurance,which protects your mortgage lender from title claims, and owner's title insurance,which protects you, the homeowner.

"Lender's title insurance protects the lender's investment in the property, making sure that the lender's lien on the property is valid," Kuhn said. "If you are financing the property, it is required by the lender."

For the lender, if a third-party claim to your property's title is upheld, the insurance policy will pay them the outstanding mortgage loan balance. For an owner, it covers things like legal costs to defend the title and losses you suffer if a third-party title claim is legitimate.

"Owner's title insurance protects the property owner against any issues that may come about once you purchase the home," Kuhn said. "It provides insurance that would pay you for [the] challenges of your legal ownership of the property."

How title insurance works

Before closing day, a title company will research your property's history via public records (you may hear this referred to as a "title search" ) to ensure the title is clear of any liens or ownership claims and that the home is available to be legally transferred to another owner. The researcher will look for any encumbrances that may restrict your right to own or use the property.

There are several types of possible encumbrances they may find. Here are three common ones:

• Liens .A lien is a legal claim on your home, using your property as collateral. An outstanding lien may exist if a previous owner failed to pay their property taxes or a contractor who worked on the home.

• Easements .An easement is a right granted to a third party to use your property even though they don't own it. For example, the driveway to access their house may run through your land.

• Encroachments.An encroachment occurs when part of your neighbor's property spills onto yours. For example, they may have a tree that grows so large it crosses the boundary between the two plots of land.

Once the title company completes the title search and identifies any potential encumbrances, it can issue your insurance policy.

It's important to note that not every encumbrance will impact your real estate deal. However, if a third-party lien is discovered during the title search, you'll likely need to pay it off to buy the house.

What title insurance covers

Title insurance is designed to be an all-encompassing protection, safeguarding you against a wide variety of issues that can arise regarding your home's title.

It can cover problems, such as the following:

• Claims from a former owner's heir

• Claims from a creditor of a previous owner (one not uncovered in the initial title search)

• Conflicting or contested wills

• Unpaid back taxes

• Unpaid legal judgments

• Deed disputes due to mental incompetence

• Owner misrepresentation or fraud

• Disputes between previous owners

• Recordkeeping errors in legal documents

• Falsified information or a forged signature on the deed to the home

If any of these covered issues arise, your title insurance will help cover the losses you suffer, as well as the legal costs for defending your home's title in court.

Important note:Title insurance protects you against problems that occurred before you took ownership. It doesn't cover new title issues that arise while you own the property. For example, your policy won't help if you fail to pay your property taxes , but it will if your home's former owner failed to.

What title insurance costs

Title insurance is a closing cost when you buy a house. The cost depends on your state and location, the house's sale price, and your loan amount.

In Michigan, for example, a home with a $350,000 sale price and $300,000 loan amount would cost a minimum of $1,073 for the lender's title insurance and $1,812 for the owner's — or about $3,000 total. In Texas, the same loan and price amount would come with title insurance costs of almost $2,500.

The amount you'll spend on title insurance will vary, but expect to pay roughly 0.5% of the home's sale price.

Title insurance FAQs

What is the purpose of title insurance?

Title insurance protects you and your mortgage lender in case a third party tries to claim your property's title. This can happen if a previous owner failed to pay property taxes or a contractor bill, if an heir to a former owner emerges, or if there are other disputes regarding who owns the property later on.

Is title insurance a closing cost?

Yes, title insurance is a closing cost. Generally, you'll pay for both the lender's policy and owner's policy as a one-time expense on the day you close on your house.

How much does title insurance cost?

Title insurance premiums vary by location, loan amount, and purchase price. In some cases, you may be able to save money by shopping around for a title insurance company. Your mortgage lender or real estate agent might recommend a company, but feel free to do your own research to find the best policy price in your area.

Who pays for an owner's title insurance policy?

The buyer typically pays for the lender's title insurance premiums, and in some cases, their owner's policy premium as well. You may be able to negotiate to have the seller cover this expense on your behalf, though it depends on market conditions in your area.

Is title insurance worth it?

Title insurance is required if you're using a mortgage loan to buy your property, but if you're purchasing your home in cash , you'll have to decide if you want this protection. Consider your budget for closing costs, as well as how much you have saved up for an emergency, when making your decision. Should a title issue arise later on, you'll need the funds to fight the claim in court or risk losing your property.

This article was edited by Laura Grace Tarpley .