Need for multiple title policies confuses homeowner

Q. My wife and I are refinancing our mortgage. We were given a list of closing costs for the refinance. One of the costs is a "lender's title policy."

I looked over our closing fees when we originally bought the house. It included a lender's title policy, which we paid for. I also received an owner's title policy that was paid for by the seller. Why do I need another title policy now?

A. You received an owner's title policy at your closing, paid for by the seller. This policy guarantees you clear title to your property for the entire period of your ownership. This means that if any claims arise that originated prior to your ownership, the title company will defend the claim and reimburse you for any loss you may suffer as a result of the claim. Some examples would be a judgment that was recorded against the property prior to your ownership or an old mortgage that was not paid off and remains a lien on the property.

When you take out a mortgage, the lender also requires they be protected from any such losses. This is the policy you paid for at your closing. It protects the lender so long as you own the property and they retain a mortgage interest.

However, now you are refinancing - paying off your old lender and obtaining a loan from a (presumably) different lender. That lender also requires title policy coverage. The prior lender's policy is terminated once it no longer retains its mortgage interest in the property.

So, unfortunately, you will need to provide and pay for a new lender's policy. I will say that in the event the old lender and the new lender are the same entity, you could argue a new lender's policy is not necessary.

Q. I wish to refinance my mortgage loan. The mortgage company I am talking to tells me I must get my home-equity loan lender to subrogate their loan to my new mortgage. What exactly does that mean?

A. Loans receive preference based upon the date their mortgage lien is recorded against your property. The following example will illustrate why this is important.

Say you take out a first mortgage for $200,000. Later you obtain a home-equity loan with a $50,000 credit line. Sometime later, you lose your job and can't make the payments on one or both loans. At the time, you owe $190,000 on the first loan and $40,000 on the home-equity loan.

The first mortgage company forecloses on their lien. Maybe because of the condition of the property or a slump in the real estate market, your home is only worth $210,000. Who gets paid?

In this situation, the first mortgage lender would get most or all of what it is owed and the home-equity lender would get little or nothing. This is because the first lender would receive its $190,000 plus interest accrued during the foreclosure process, attorneys fees and other foreclosure costs incurred. This will not leave much for the home-equity lender.

Now, let's assume you refinance the property. The refinancing lender's loan would be recorded after the home-equity loan. Assuming the situation above occurred after the refinance, and no subrogation was agreed upon, the home-equity lender would be paid in full and the refinancing lender would receive what was left, which would be less than if they were in a first position.

So, what almost always occurs in these situations, is the refinancing lender demands the home-equity lender "subrogate" their loan to the new loan. This puts the refinancing lender back in a first position. The second lender hasn't given up anything as it remains in the same position it was in prior to the refinance. The second lender's position only becomes worse if the new mortgage loan exceeds the prior first loan balance.

Getting the second lender to subrogate their loan to the refinancing lender is usually routine.

• Send your questions to attorney Tom Resnick, 345 N. Quentin Road, Palatine, IL 60067, by email to tom@thomasresnicklaw.com or call (847) 359-8983.