Whether you are just starting to think about how much money it will take to buy a new home or you are ready to apply for your mortgage loan today, it is important to consider the closing costs associated with buying a home. For most home buyers, the down payment will be the largest portion of the funds needed to close on the real estate. A down payment may range between at least five and 20 per cent of the sales price in most cases. Closing costs, however, can also add up to a rather considerable amount of money, so it is important that you estimate your closing costs now and make sure that you have enough funds available to pay for these expenses too. This will ensure that you do not run out of funds at the closing table.
What are Closing Costs?
As you are buying a home and applying for a mortgage loan, you will need to pay your down payment for the home, and you will also need to pay for a host of other services and disbursements. These relate to everything from real estate or land transfer taxes and property insurance to appraisal fees, lender's fees and more.
Mortgage Default Insurance
If you plan to use a down payment that is less than 20 per cent of the sales price and the sales price is under $1 million, you will be using what is known as a high ratio mortgage. With this type of mortgage, it is a requirement that the loan is insured by one of two entities. These entities include Genworth Financial Canada or Canada Mortgage and Housing Corporation. The cost of mortgage default insurance. will vary based on the amount of down payment that you are placing on the transaction as well as the loan payment.
Land Transfer Taxes
In addition to mortgage insurance, some Canadian provinces will also charge a special tax when ownership of real estate is transferred. The amount of this fee can vary from province to province as well as based on the sales price. In addition, some municipalities also have a land transfer tax. It is important to take a closer look at the cost of this tax in your local area before you select the real estate that you want to purchase. In some cases, decreasing your sales price just slightly so that it is below a certain threshold for the land transfer tax can result in considerable savings to you
There are also legal fees and notary fees that will be assessed during a closing. Even if you choose not to work with a lawyer or notary yourself during the loan process, the lender will use these services on your behalf as well as for disbursement of funds. These costs associated with the purchase of real estate will then be conveyed to you. Your mortgage professional or real estate agent can help you to estimate how much these fees may be.
Mortgage lenders generally will require property owners to purchase and to maintain a real estate insurance policy. This policy will list the mortgage company as a beneficiary, and this ensures that if the property is destroyed, the mortgage loan will be repaid with the insurance benefits. It is important to note that the cost of property insurance can vary considerably based on the insurance company, the type of home, the size of the home and its estimated value. Some insurance companies may require a property inspection, so it is important to consider the total cost of insurance when selecting a property insurance company.
Appraisal and Inspection Fees
An appraisal is a standard part of the mortgage process. Some appraisers will demand up-front payment for their services, so this may be an out of pocket cost for you. Others will allow you to pay for their services at closing. The cost of this fee will also vary, but in many cases, it is under $500. While an appraisal is typically a requirement, a property inspection is generally an optional (but recommended) charge. This is a report that will provide the buyer with more information about the condition of the property, and the cost may be several hundred dollars or more.
Interest on your new loan will begin accruing on your closing date. However, you may not make your first scheduled payment for several weeks. Therefore, you typically will see interest charges on the closing statement. This is a financial adjustment that can vary significantly based on the lender's policy regarding when the first scheduled payment will be made, what date the loan closes and the average daily interest charges.
When you purchase real estate, the title of the property will be transferred into your name. When issues related to title defects, fraud and more arise; you could be at risk to lose title to the property. Title insurance protects you from financial loss in relation to these events. The cost of title insurance can vary, but it generally is only a few hundred dollars.
Estimating Closing Costs
Most of the individual closing costs that you may be responsible for may range from a few hundred dollars to over $1,000 in some cases. All of these costs can add up to a fairly large amount of money. In order to avoid running the risk of falling short of funds at closing, it is imperative that you estimate closing costs and ensure that you have enough funds available to pay for the down payment as well as the closing costs. There are online calculators that you can use for a rough approximation.
All real estate transactions have closing costs associated with them, but the fees can vary considerably. So, it is important to estimate the fees carefully and plan for them as you near closing.
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