The Importance of Budgeting for Closing Costs
An often overlooked cost associated with purchasing a home is the transactional cost. First-time homebuyers buying a home with the minimum five percent down payment are often guilty of not putting enough money aside to cover closing costs. Here’s a fact that may shock you – closing costs can amount to anywhere between 1.5 percent and 4 percent of your home’s selling price.
Closing costs are your responsibility as the buyer – your mortgage lender will not pay for them. That’s why it’s crucial to put enough money aside, so you’re not left struggling to find the extra funds right before closing.
Now that you understand the important of budgeting for closing costs, let’s take a look at the most common closing costs homebuyers face.
Deposit: 5 percent of Purchase Price
Buying a home is a major purchase, so it’s only natural the seller will want some form of financial commitment to ensure you’re serious about buying their property. The amount of your deposit depends on the location you’re buying, but a common rule of thumb is to set aside 5 percent of purchase price for your deposit. If there are any issues with the deal (you’re not satisfied with the home inspection), it’s at the seller’s discretion to return your deposit. That’s why some buyers choose to make two deposits (one smaller amount at the time of offer and one larger amount after the conditions have been met) to reduce the risk of a substantial amount of your money being held up. But just keep in mind that this can work against you in multiple offer situations, so proceed with caution.
Home Inspection: Approximately $500
If you’re like most buyers, purchasing a home will be the biggest financial commitment of your lifetime. Before you spend your hard-earned money you’ll want to make sure there aren’t any major issues. Structural issues and faulty wiring are just a few of the unforeseen costs that can run new homeowner’s renovation costs in the thousands. It’s better to find out your house has knob and tube wiring or asbestos before you’ve signed on the dotted line than finding out after. Not only can a home inspection provide a valuable bargaining chip when dealing with a seller, it can be a great way to budget for upcoming home maintenance and repair expenses, such as a new roof or new windows. This is especially handy for first-time homebuyers, who often have no idea how expensive the upkeep of a home can be.
Down Payment: 5 percent or more of Purchase Price
Not to be confused with your deposit, your down payment is the sum of money delivered to the seller on the closing day. The timing of your down payment is slightly different than your deposit – while the payment of your deposit comes at the time of offer, your deposit is paid to the seller on closing day. You’ll often deliver a certified cheque to your real estate lawyer, who will pay the funds via escrow to the seller’s lawyer.
Land Transfer Tax: Varies by Province, Based on a Percentage of Purchase Price
Land transfer tax is often the most substantial transactional cost of buying real estate. When you purchase real estate, the provincial government will want a piece of the pie. The land transfer tax is a percentage based on your home’s purchase price – the higher the selling price, the higher the amount of land transfer taxes owed.
To help first-time homebuyers with the steep cost of purchasing a home, provinces often provide a full or partial rebate. Some cash-strapped cities like Toronto have introduced a municipal land transfer tax as a way to help raise tax revenue. That means if you’re buying a home in Toronto proper, you’ll have to pay two land transfer taxes: a provincial and municipal one. So make sure you budget for them.
Real Estate Lawyer Fees: Approximately $1,500
You wouldn’t represent yourself in court, so don’t purchase a home without a lawyer either. Buying a home is a big investment – a real estate lawyer will ensure all your T’s are crossed and all your I’s are dotted before you sign on the dotted line. Your lawyer will make sure your home’s title is clear from defects, calculate your land transfer taxes owed, and prepare your mortgage paperwork. You shouldn’t wait until the last minute to find a real estate lawyer – you should have one selected even before you start house hunting. As your realtor probably isn’t an expert in real estate law, it’s a good idea for your lawyer to review your Agreement of Purchase and Sale to make sure you’re fully protected.
Mortgage Broker Fees: Free
In most cases, you won’t have to pay a cent to your mortgage broker. Their services are usually completely free. That’s because a mortgage broker is typically compensated directly by the lender by way of a finder’s fees.
A mortgage broker brings a lot to the table. They aren’t tied to any one lender, so they offer unbiased advice. They shop the mortgage market on your behalf to help you find the best mortgage product for your own financial situation.
Not ready to buy a home at the moment? Many lenders offer 90 to 120 rate holds. By getting pre-approved for a mortgage with a mortgage broker, not only can you protect yourself from higher interest rates, you’ll know what your approximately budget is to spend on a home.
You may also be interested in: First Time Homebuyer Closing Costs
Writer: Sean Cooper
Sean Cooper bought his first house when he was just 27 and paid off his mortgage at 30 in 3 years. An in-demand personal finance journalist, money coach and speaker, his articles have been featured in publications such as the Toronto Star, Globe and Mail, MoneySense and Tangerine’s Forward Thinking blog. He makes regular appearances on national radio and television shows to discuss personal finance, real estate and mortgages. He’s also the bestselling author of the book, Burn Your Mortgage, which helps anyone—from new buyers to experienced homeowners—achieve the
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