Whether you’re buying a home or refinancing, the fees can be brutal. One of the least understood: title insurance, which can run from a few hundred dollars to thousands.

Depending on what state you live in, it may pay to comparison shop, as some title insurers are cheaper. Although basic title insurance rates are fixed by regulators in some states, you still might save on unregulated ancillary fees by looking around.

Paying more than you have to for title insurance and other closing costs has the effect of increasing the interest rate on your mortgage. Use the Mortgage APR Calculator to see how this works.

What is title insurance?

Basically, it protects the lender from loss in case something goes seriously wrong, like it turns out the seller didn’t have clear ownership, or title, to the property. In some cases, for instance, the seller has undisclosed liens for unpaid bills or taxes.

Most of the cost is not for the insurance itself but for the “title search” that is done to see if there are any obstacles to the sale. Agents for the title company generally do this by going through courthouse records, a tedious process.

Title companies have come under fire in a number of states where lawmakers or regulators feel the fees are too high. The firms could face a new level of scrutiny if the Obama Administration prevails on its proposal to establish a Consumer Financial Protection Agency.

For now, though, the system remains the patchwork it has been for many years.

If you are buying or refinancing, the first step is to find out if fees in your state are fixed. The American Land Title Association, the industry’s trade group, says fees are firmly fixed in Florida, New Mexico, Texas, New York, Pennsylvania, New Jersey, Ohio and Delaware.
To shop around, look in the Yellow Pages under “Title Companies,” or use the association’s search tool.

Whether fixed or not, the rate typically depends on the value of the property. In Pennsylvania, for example, the charge would be about $1,360 for a $200,000 home, and nearly $2,860 on a $500,000 home.

Also check to see if there are discounts. The charge on that $500,000 Pennsylvania home would be $1,800, rather than $2,860, if the home were refinanced within two years. Rates are often lower on newly constructed properties being sold for the first time, since there’s less history for the title agent to study.

Consumer advocates warn home buyers against simply accepting without question a real estate agent’s recommendation on a title company. Although kickbacks are illegal, there could be some mutual back-scratching that prevents the real estate agent from pointing you to the best deal.

Title companies typically preside over the closing, making sure all payments and paperwork are proper. Even if the basic rate is fixed, title companies often tack on other fees that are not. So it pays to shop around for the best deal with all costs included. It’s also worthwhile to select a title company with a convenient location, as there’s often some last-minute rushing around with paperwork.

Among the bigger insurers are: Fidelity National Financial, Inc. (Stock Quote: FNF), Old Republican International Corp. (Stock Quote: ORI), First American Corporation (Stock Quote: FAF) and Steward Information Services Corp. (Stock Quote: STC). A new Web-based company, Entitle Direct Group Inc., claims it can save customers at least 35%.

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