When it comes to buying a home with a mortgage, there’s much more to consider than just the down payment and the monthly payments. There are also closing costs involved, which can vary depending on location and the type of loan. These costs can add up quickly and impact your finances. However, with some research and understanding your closing costs, you can save money and prepare better for the final costs of your home purchase.
What IS a Closing Cost?
First, it’s essential to understand what closing costs are. Closing costs refer to the expenses involved in finalizing the mortgage at the end of the home purchase. It includes Legal Fees, Title and Home Insurance, Home Inspection and even property tax adjustments at closing. They can range from 1.5% to 2% of the home purchase price. That means if you’re buying a house for $300,000, you could end up paying $4500 to $6000 in closing costs alone.
Property Transfer Tax
Property transfer tax is a provincial tax that is levied on real estate transactions in Canada. The tax is imposed on the fair market value of the property being transferred, and it is typically paid by the buyer at the time of closing. The amount of tax can vary depending on the province or territory where the property is located.
In British Columbia, for example, the property transfer tax rate is 1% on the first $200,000 of the fair market value, 2% on the portion of the fair market value between $200,000 and $2 million, and 3% on the portion of the fair market value greater than $2 million. First-time homebuyers may be eligible for an exemption or partial exemption from the tax if the purchase price of the property is below a certain threshold.
Legal Fees & Insurance
Typically, the costs for legal fees in Canada to convert the title into your name and register the mortgage at closing time are between $2200 – $2500 per transaction. Interestingly, the large majority of these legal fees are paid to government itself in the way of land title office and registration fees. Don’t forget that most lenders will also require title insurance, which will also be collected at your law office at closing. This policy will protect the lender in the event of any title fraud and/or missed details at the land title registry.
Technically, a closing costs is a one time fee. Though Insurance will be an ongoing an annual cost, we include it in the closing cost scenario as it is the first time you will be pay it if you are a new homebuyer. Be sure to budget anywhere between $1200-$2200 depending on the type of property as well as purchase price to determine the cost of this coverage.
It is always a good idea to have your home inspected before moving forward with the purchase. Think of it this way, a typical home inspection will likely cost between $400 and $600 depending on the size and scope of the property. Are you better to pay this fee and cost in order to find something that could cost you thousands of dollars AFTER you close on the property? I would say YES!
However, is it also worth it to pay the same amount of money and inspection costs for peace of mind and to realize that you are buying a property that will not have any immediate need for repair. I would also say YES! Be sure to budget for this amount in advance. And keep in mind if most people would spend $200 to have a $10,000 car inspected, then paying $400 to have a $500,000 property inspected makes sense. Arguably, this could be the biggest part of understanding your closing costs.
Property Tax Adjustments
Finally, depending on when during the calendar year, that you close on your purchase, there is likely to be a property tax adjustment. A property tax adjustment is where typically the seller has already paid their annual taxes in full for the entire year in advance. Because you will be purchasing their property during that same year, you will owe them a credit for the amount they have already paid. Or, if the sellers are yet to pay the tax bill themselves, they may actually owe you an amount, should the tax bill not be due until after you close on the purchase.
For example, if you were closing on your purchase on the 180th day in a calendar year, but the taxes aren’t due until day 200 the sellers will owe you for the 180 days that they’ve enjoyed the property before you take possession. Sounds confusing? Don’t worry, the property tax adjustment amount will be calculated by your solicitor at closing. This means they will do the work for you as part of the closing process.
Buying a home comes with its share of expenses, but with proper research and negotiating, you can save money along the way. Take the time to shop around, ask questions, and negotiate fees. Remember, closing costs can vary, so take all things into consideration when choosing a lender. Educate yourself on the different taxes and fees involved in your state to prepare for the final total of closing costs. The more knowledgeable you are, the better equipped you’ll be to make informed decisions. In the end, understanding your closing costs will make for a smooth purchase.