You’ve come up with a down payment, searched for a good lawyer, and have found a reputable mortgage broker. Well done! You’re off to a great start in the house purchase process. Keep in mind that you’ll also be facing – in addition to the expected legal fees and moving costs – a few extra payouts when the final deal is done. Knowing about these “closing costs” in advance soothes their sting. The following list covers typical costs you’ll encounter when you purchase is completed or “closed”.
Reimbursements. You’ll need to refund the money that the seller has already paid out on your behalf: expenses that are now fairly and rightfully owned by you, the new homeowner. In your lawyer’s office, on closing day, you’ll definitely run into those famous last words: “subject to the usual adjustments”. Typically these adjustments include portions of municipal property and school taxes for the months you’ll be resident, utility bills paid in advance, fuel oil that you will be using – that kind of thing. These expenses would have to be paid by you anyway, so they are fair.
Land Transfer or Similar Tax. Your province levies this tax whenever real estate changes hands. It’s sometimes also called (ironically) a “welcome tax”. They do literally get you coming and going! The amount of this tax is a percentage of the purchase price of your property, so the more expensive the property, the bigger the tax. Ask about Transfer Taxes in your province or the province you are moving to for full details.
Home Insurance. This insurance, especially fire, must take effect from the moment you are the owner of the home. It’s all about protecting the investment for the lender – and in this case it works for you too.
Mortgage Life and Disability Insurance. This is an especially good idea for young parents or anyone else with dependents. If anything should happen to either one of you, your home ownership won’t be in jeopardy. The mortgage would be paid in full – immediately – on your behalf. You’ll appreciate and need this peace of mind in a time of crisis, and you’ll save your family the extra burden of wondering if they would need to sell their home (even while they’re coping with a loss). Your broker can often help you find a policy that works for your situation.
Home Inspection Fee. This is the fee you owe the inspector you hired to check out the physical structure and mechanicals of your home before you decided to buy it.
Home Appraisal Fee. Your lender requires this appraisal before they hand over any mortgage money. Naturally, they want to be assured that the property is worth an investment of their monies, and naturally, the cost of this appraisal is passed on to you, the customer. This fee normally ranges between one and two hundred dollars – dependent upon location and complexity of the property.
Survey. A legal survey of your land – its borders, perimeters, house placement, etc. – is sometimes required by the lender, and will be performed by a professional surveyor. If you’re lucky, a recent survey is already available; if not, a typical survey can cost you up to one thousand dollars. In the last few years, lenders have accepted title insurance (highly recommended anyway) in lieu of a survey document. Which brings us to...
Title Insurance. This covers a myriad number of oddball situations that could threaten your title to the property. Title insurance is much less costly than a new survey, for example, and would cover most survey concerns anyway. Most homebuyers now look at title insurance as a great way to protect their biggest investment.
Don’t Forget GST. This tax is charged on all professional fees. There is no GST on the purchase price of a resale home.
Legal Fees and Disbursements. Speak to your lawyer about their fee schedule. Typically between $1,000 and $1,500.
Closing Day! Today is the day legal title to the property changes hands. You’ve been busy packing, cleaning, and organizing the moving procedure at either end. The last thing you need to do is traipse down to the lawyer’s office...but that’s exactly what you’ll have to do. Your lawyer will sit down with you, carefully go through a pile of papers for signing, point out closing costs. But a good broker can help you be well prepared for all the things that happen before the new house keys are finally in your hand.
Most mortgages have the option to allow payments to be made on a weekly or bi-weekly basis. This option may be desirable for two reasons. The first is it can save you money as you can expect to pay off your mortgage about 4 years sooner. This can save you dramatically over the life of your mortgage. The other reason why these options are so popular is that if your employer pays you on a weekly or bi-weekly basis, you can simplify your budgeting by making the payment line up with the way you paid.
Paying extra amounts on your mortgage can make a big interest saving over time. When we select a mortgage company, privilege payments options are something that we look for. A 20% privilege payment will allow you to pay off up to $20,000 per year on a $100 000 mortgage. It is important that the privilege payment also be flexible to allow you to pay smaller payments on the mortgage and as often as you wish. An extra $1000 periodically paid on a mortgage can help you become mortgage free faster.
When you require a mortgage for more than 75% of the purchase price of a property, that mortgage must be insured by Canada Mortgage and Housing (CMHC) or GE Mortgage insurance. The premium charged by these company`s decreases as the down payment increases. When you finance your property at 95%, a premium of 2.75% is added to the mortgage. By increasing the down payment to 10% of the purchase price the premium can be reduced to 2.5%. If you can put down 25%, you can avoid any additional insurance fee. Depending on your situation there are ways that you can structure this financing to avoid the CMHC or GE insurance premium.
As mentioned above, when you put a 25% down payment on your purchase you can avoid the CMHC premium. More importantly the larger the down payment, the lower the amount of interest you will pay over the life of your mortgage. It is important to note that it may not be wise to stretch yourself to increase your down payment and end up borrowing on credit cards or a line of credit at a higher rate.
The options for mortgages available can be very confusing for most mortgage shoppers. Terms for mortgages vary between variable and fixed rate, 6-month terms to 10 year terms. Taking a variable or floating rate mortgage can have savings. Typically the shorter the term or guarantee of the rate, the lower the rate will be. This does not always happen, depending on the market place and the economy, but history has shown that short-term rates tend to be lower than long-term rates. The up side of variable rate is the strong potential for interest rate savings. The down side is the fact that you are accepting the interest rate risk without a guarantee. If you are considering a variable rate mortgage you need to look at your own risk tolerance, and your cash flow available to deal with potential increased payment. Considering projections of rates and where we see interest rates heading can also be important in this decision. Make sure you talk to an expert when you are making this decision.