The very first thing you should know about closings costs is – That there will be closing costs when you purchase a home! Sounds pretty simple and obvious, I know. However, time and time again we visit with purchasers who are not fully aware of the additional costs involved in the acquisition, purchase of a home.
Estimating and accounting for your closings costs after you have made your purchase is about as pleasant as a root canal, sorry dentists. Closing costs are unavoidable so the best approach is to budget and prepare for them ahead of time.
Let’s have a look at some of the constant closing costs for every home buyer.
Land Transfer Tax: This is typically the largest charge and expense when buying a new home. It is calculated by using the purchase price of the home and multiplying it by applicable tax rates. The rates start at 0.5% for the first $55,000, 1% for $55,000 up to $250,000, 1.5% for $250,000 up to $400,000 and 2% for any amount over $400,000.
Oh, by the way, if you are purchasing in Toronto, they have their own Land Transfer Tax over and above the Ontario Tax.
For both taxes, there is a First Time Buyer Rebate. For Ontario, the amount is $2,000. For Toronto, the maximum rebate is $3,725.00. Make sure you qualify for this before you plan for the rebate in your budgeting.
Legal Fees and Disbursements – Your lawyer will charge a fee for their professional services involved in closing your transaction. This includes such items as preparing the title deed, preparing the mortgage, and conducting the various searches. Fees vary from lawyer to lawyer. Standard disbursements include title insurance, registering the deed and mortgage charge, performing a title search and preparing your tax certificate.
Adjustments On Closing – Consider these “rebates” or “refunds” to the seller. They are actually reimbursements to the seller for any pre-paid items in which the seller paid for beyond the closing date. In other words, you are reimbursing the seller for any expenses he has paid that benefit you. This applies mainly to property taxes and condo maintenance fees. So, if the seller has paid the property taxes in full for the year, and you are closing in October, he would be rebated on a pro-rated basis for October, November and December.
Interest Adjustment: Some lenders still prefer to start mortgage contracts on the first of the month. However, if your closing date is on the 15th of the month, the interest must be “adjusted” The interest adjustment cost covers the interest costs from your closing date and your first scheduled payment, which would likely be the first day of the following month. It is not applicable in every case but something buyers should be aware of.
Home Insurance – You must have home/fire insurance in place in order to obtain your mortgage. I don’t consider this a typical closing cost, but it is a mandatory expense when purchasing.
Mortgage Loan Insurance: If your down payment is less than 20%, you have to pay for mortgage loan insurance. Although the fee is added to your mortgage, the Sales Tax is “not included”. This becomes a closing cost and you must account for this expense.
HST for New Homes – Be sure to check that your HST is included in your sales price and not listed as a separate item. Especially if purchasing an investment property.
New Home Warranty – Enrollment in the Tarion New Home Warranty Program is mandatory. Some builders include the enrollment fee in the purchase price and some may not.
Property Appraisal – An appraisal may be required for you to obtain your mortgage. Costs will vary based on location, type of home and purchase price.
Home Inspection – Still optional but most purchasers buying a resale home will engage a home inspector.
Estimate your closing costs in advance and be sure to include them in your budget. For too many buyers either do not account for closing costs or under estimate the closing costs. Performing this exercise once you have purchased your home is too late. Using the “rule of thumb” method of 1.5% to 2% of the purchase price is simply not accurate. Every situation is different and I know you want to be an informed purchaser.
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