Refi hit with title insurance 'junk fee'

DEAR BENNY: We are in the final steps of completing a refinance of our barely year-old $410,000 mortgage. We were pleased with the interest-rate drop, and our local bank was generous in dropping many of the so-called "junk fees" associated with a refinance. However, we are being charged $1,007 for title insurance. When I asked our banker about this, the response was basically, "Well, yes, it is a rip-off but there is nothing we can do about it."

My question for you is what do we get for this $1,007? And if we refinance again in a year (you never know), I assume we will have to pay this again? --Shelley

DEAR SHELLEY: This is a question everyone always asks, whether they are buying a house or refinancing an existing loan. Why do we need title insurance? The simple reason: The lender always insists on it. If your banker believes it is a "rip-off," ask him if he is willing to waive this requirement. I doubt that he will.

Title insurance protects the lender (and you if you have an owner's policy) against matters that do not appear on the land records. For example, there may have been a forged deed years ago and now there is a claim about that. There may be unpaid tax liens that could cause you grief without the title insurance policy.

But your position is: "Hey, we own the property and got a title policy when we bought it. Why does the lender need a new one? I asked Jack Guttentag, the Mortgage Professor, this question, and here's his response: "You don't need a new owner's policy, but the lender will require you to purchase a new lender policy. Even if you refinance with the same lender, the existing lender's policy terminates when you pay off the mortgage. Furthermore, the lender is concerned about title issues that may have arisen since you purchased the property. A new title search will uncover any such issues, and you will have to pay it off as a condition for the refinance."

One suggestion: Since you only recently obtained a title policy, you should be entitled to a discount -- called a "reissue rate." Don't forget to ask for it.

DEAR BENNY: I used the equity in my primary residence to take out a home equity line of credit (HELOC). Two years ago, I used the HELOC to buy a condo as a second home. I am about to sell my primary residence and make a nearly $150,000 profit. I do NOT want to pay off the HELOC right now, as the condo is worth just $50,000 and I paid $150,000 for it.

Must I pay off the HELOC when I sell my primary house? I am a nervous wreck thinking that all the profit I just made is going to have to go to pay off that condo, which is worth less than half of what I paid for it. Since the HELOC is a 10-year line of credit, can I continue to pay monthly on this? --Stacey

DEAR STACEY: Sorry, but you will have to pay off the HELOC when you sell your primary residence. A HELOC is a "home equity line of credit," which is recorded as a mortgage (deed of trust) among the land records where your house is located. If you have a first mortgage, the HELOC is a second trust.

When someone buys your house, they want title to be free and clear of all liens, encumbrances and mortgages. The HELOC lender will not release its lien on the land records unless that loan is paid off in full.

The HELOC lender made this money available to you based solely on the equity in your house. If you were to default by not making payments, the lender would be able to foreclose on the property.

But once the HELOC is released from land records, that lender has no more security. If the condo unit had any real equity, you might be able to get a new HELOC using the condo as collateral. But unfortunately, it does not.

If your credit is good and you have other assets, a lender might be willing to give you an unsecured line of credit, but that's very difficult to get in today's economy.

DEAR BENNY: We currently own several investment properties, along with our home. When we are ready to retire, we would like to be able to liquidate all of the properties in the same year, and in turn purchase a large bed-and-breakfast property.

Will we be able to defer the capital gains on all of the properties that we liquidate if we turn around in the same year and purchase one larger, more expensive property? --Kim

DEAR KIM: Yes, it is legally possible, but logistically improbable.

If you own investment property, in order to defer (not avoid) capital gains tax there is a legal procedure known as a 1031 exchange (commonly called a "Starker exchange"). Under section 1031 of the Internal Revenue Service Code, if you carefully follow the rules, you can obtain a replacement property (or properties) and defer the capital gains tax. Oversimplified, the tax basis of the old property (called the relinquished property) becomes the basis of the replacement property. ...CONTINUED

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