Beware the ghosts of mortgages past.
When you pay off a mortgage, the lender is supposed to remove the lien from the record.Typically, you even pay a "reconveyance fee" to have it done. That ensures that you - or future owners - won't hit a snag when selling, refinancing or applying for a home-equity loan and need a clear title.
But some lenders, in a practice that's become standard operating procedure, leave the lien on the record and, if a new lender or title company asks, write a letter of indemnity assuring they no longer have a claim against the
property. That shortcut works - as long as all the title companies can find each other. But when a link in the indemnity chain letter breaks, closing can
stall. What if you're trying to refinance and you find that the previous owner's mortgage is still on the books - and his lender isn't in business
anymore? Or what if you're waiting for the bank to approve your home-equity loan, and the lender balks when an old remodeling loan you paid off years ago shows up on the record?
Such snags kill closings "all the time," says Edward Flynn, manager of the escrow department for Attorneys' Title Guaranty Fund in Chicago.
Sometimes, Flynn says, the sale will go through, but the title company will hold on to part or all of the sale proceeds until it's satisfied that all earlier lien holders have been paid off.
Your owner's title insurance policy, which you buy when you close on a mortgage, should cover problems from old liens filed on the property before you bought the house or refinanced.
But subsequent liens, such as from your home-equity credit line, aren't
covered. Whenever you pay off a mortgage, insist on receiving a document that confirms that the lender has removed the old lien, says William Bowen, president of Title Recon Tracking, a California firm that does reconveyances for banks.
"If you have that document, you are covered no matter what," he said.