16 Apr

Understading Closing Costs

General

Posted by: Roberto Pelaccia

Closing Costs is a broad term that describes all the costs you are obligated to pay at the point of when your real estate transaction is being finalized, and you are just about to take possession of your home.  It is made up of different items and most of their costs are not set or fixed, but rather the cost is dependent on the size of your purchase and mortgage you are registering. 

 For a first time homebuyer this can be confusing, so here are some items that are typically a part of the closing costs. 

 Legal costs:  These costs are for a lawyer to confirm the conditions of the mortgage financing have been met on behalf of the lender.  It also consists of registration of the title of the property in your name, and all the applicable searches.  Disbursement fees can be charged if people or entities need to be paid from the proceeds of the transaction (mostly common in refinance scenarios).  Typical legal costs can start as low as $700 + HST, but can be higher for larger purchase prices.

 Title Insurance:  Title Insurance is insurance that protects you from someone stealing the title of your property.  Consequently, if they were able to defraud the title of your home they would own your home, and then be able to kick you out of it.  You would then have to fight to prove that they defrauded you.  It was becoming a growing criminal activity across the country.  Since then lenders no longer offer the option of purchasing title insurance, but rather make it a condition to lending you the mortgage.  Title Insurance is a one-time purchase and is typically $250-300 + HST.

 Land Transfer Tax:  This is typically the largest portion of your closing costs.  This is a provincial government tax on all transfer of property titles.  This is done on a sliding scale and the percentage charged increases at certain dollar amount thresholds.  The city of Toronto also has a their own version of the land transfer tax, and this would be an additional tax on top of the provincial tax.  The Canadian government offers a rebate for first time homebuyers and this caps out at $2000.  For example the amount of Land Transfer Tax on a home purchase of $500,000 is $7225.  As a first time buyer you would receive the $2000 rebate at closing, so you would effectively pay $5225.  

 Adjustments:  This refers to the adjustment of property of taxes and condominium fees.  Since you typically do not move in to your new home on January 1st, the previous owner pays for taxes, and maintenance fees ahead of time.  They are now leaving and you have to pay for the fees that you will now be taking over.  Fees can vary depending on the amount of property taxes and condominium fees that been previously paid. 

 Tax on Insurance: Mortgage default insurance is required on all mortgages in which your down payment is less then 20% of the value of the purchase price.  The insurance itself is typically added back on the mortgage, but the HST is required to be paid at closing.  On a mortgage of $500,000 and just 5% down, the expected HST is expected to be approximately $2050 due at closing.  And sorry, no government rebate offered for first time homebuyers on this one. 

 Other Costs not apart of closing:

The inspection: It provides a detailed look into the quality of the home.  It is done typically just after the seller accepts your offer. Average cost $350-450. 

The appraisal offers details of the value of the property in the current market place.  It is done after you have a commitment from a lender, and can be apart of the conditions of financing.  Average costs $350-450.

House Insurance is required to be arranged for you new property prior to the closing, and is verified by the lawyer on behalf of the lender. Premiums can vary.  Budget of $100/month is reasonable.