Final answer:
Title insurance protects against financial loss due to defects in the title to real property, such as disputes over ownership or undisclosed liens. It's part of the broader real estate transaction process that often involves an escrow service to handle property taxes and home insurance payments.
Step-by-step explanation:
Title insurance is a specific type of indemnity policy that protects against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage loans. One typical situation that title insurance would protect against is if there's a dispute over the property's ownership after the purchase. This can occur due to several issues such as undisclosed heirs, fraud, forgery, or errors in public records. Title insurance would also protect against liens or encumbrances on the property that were not discovered during the title search before purchase.
When it comes to escrow in the context of real estate transactions, it serves as a mechanism to ensure that the buyer's funds are used for their intended purposes and not released until all the terms of the sale are met. An escrow account may also be used by homeowners to save for property taxes and home insurance, contributing a portion of these expenses each month along with their mortgage payment. This helps to simplify budgeting for these large annual or semi-annual expenses.