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When a homeowner refinances a purchase money loan using a home equity loan, and the purchase money loan is going to be paid off in its entirety upon closing the home equity loan, the title company closing the new loan is supposed to see to it that a Release of Lien is filed of record. The Release of Lien gives to the public that the original purchase money loan is paid off.

Without the Release on file, the homeowner will almost certainly run into delays when he decides to put the home up for sale in the future. What usually happens when no release of lien is filed goes something like this: The homeowner puts his house up for sale and gets a contract on it. They open title, and set the closing date. The title commitment is issued and shows TWO liens on the property, the current home equity loan, AND the original purchase money loan. The title company calls and the homeowner says that the purchase money loan was paid off when he refinanced the house. Now the title company gets to work. First, they ask the homeowner for a copy of the settlement statement from the refinance. Upon examination, it appears that the purchase money loan was paid off. Now the current title company contacts the title company that closed the home equity loan to obtain an “indemnity letter,” which is a letter that gives coverage to the current title company by the previous title company for any claim based on the non-payment of the purchase money loan. (There are other ways to clear the lien, but we’ll save those for later blogs posts.)

Here’s where the delay occurs. Many title companies can take a week or even two weeks to pull their files, examine the title, determine that a Release of Lien should have been filed but was not, and issue the indemnity letter. Once the indemnity letter is received, the current title company can proceed to close the sale and issue a title policy to the new owner with confidence that the title is free and clear of all prior liens.

So the moral of the story: A homeowner would be wise to ask for a copy of the filed release of the purchase money lien by simply calling the title company which closed the home equity loan a couple of months after the closing.