What Are Closing Costs In A Real Estate Transaction?
Buying a home requires careful financial planning. While the purchase price, mortgage payments and broker commissions are top of mind with most first time buyers, closing costs are not given as much consideration and are often underestimated. Closing costs are one-time fees that a real estate purchaser must pay and, in most cases, must be paid upfront and cannot be rolled into the mortgage.
Remember, that your purchase price is excluded from closing costs. Closing costs can vary, and it is prudent to budget between 1.5% – 4% of the home’s purchase price, so for instance budget $7,500 – $20,000 on a $500,000 home.
Most common closing costs:
Property appraisal This is required by the lender on a conventional mortgage (with a minimum 20% down payment). It gives the lender assurance that the property price in the contract is accurate and not inflated. Typical appraisal fees vary from $350 – $500.
Title Insurance The lender may require a lender’s title insurance policy to protect from any ownership dispute after buying your home such as title fraud, zoning violations, and property defects. The cost of this is usually added by the lawyer to the final legal bill and can cost upward of $300.
Land survey certificate This a legal document that outlines the exact placement of the property and includes the dimensions and boundaries of the plot. In many cases, the current landowner may have a copy, so this may not be necessary. Average cost of this certificate is around $500.
Home inspection fee The buyer of the home must pay for this. So, if you are having this highly recommended action performed, expect to pay upwards of $500. A home inspection will make you aware of any problems pertaining to the property.
Home Insurance Home insurance is required when obtaining a mortgage. Rates are conditional on the size and features of the property and will vary from broker to broker.
Mortgage default insurance When the down payment is less than 20% of the appraised value, mortgage default insurance will be required as the mortgage is deemed as a high-ratio mortgage. The cost of this type of insurance ranges from 2.8% – 4% of the total mortgage amount and must be paid in full at closing.
Property tax adjustments Property taxes are due every year, and can be paid monthly, quarterly, twice a year or in a lump sum payment for the whole year. If the seller has paid the property taxes, you will be required to reimburse them a prorated amount from the closing date.
Utility bills and condo fees As with property taxes, the seller may have prepaid certain utility bills and condo fees. A certain portion of these will be required to be repaid on closing.
GST on new homes New home purchases are subject to GST. If the builder has factored this cost into the purchase price, it can be added to the mortgage. If not, it will become part of the closing costs.
Land transfer tax This is a percentage of the purchase price of the home. The more expensive the home, the higher the expense. First time home buyers are sometimes exempt from paying this. There is no GST if land transfer tax is charged and vice versa, however, some provinces and municipalities are beginning to charge this tax on new constructions.
Estoppel certificate If you are buying a strata lot or condo, an estoppel certificate accompanied by the financial statements of the condo corporation is required by the lawyer or notary. Once the statements have been reviewed, any shortcomings will be identified.
Legal fees Legal documents such as a title search, drafting a title deed, mortgage preparation documents and the movement of funds are all part of the closing functions performed by a lawyer or notary. Depending on the complexity of the mortgage and real estate transaction, expect anything from $1,200 upwards.
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