Wednesday, May 8, 2013

Closing Costs on a Home Purchase

“How much are closing costs?”
This is one of the most common questions asked by anyone purchasing a home.  Your lawyer can give you an exact amount a couple days before closing.  You still may wish to have an estimate so I have broken things down a little bit for you so you won’t get the closing costs shock when it is too late.

For this example we will use a home that has a $400,000 purchase price with estimated property taxes at $4,000 with you using 5% as their down payment. 

1.       $800 Lawyer Fee

2.       $300 Title Search (aprox)

3.       $350 Title Insurance

4.       $150 Title Registration

5.       $836 PST on CMHC Premium

6.       $2,475 Land Transfer Tax (add $2,000 if not a 1st time home buyer)

7.       $1,000 3 Month Property Tax Pre-payment

8.       $450 Disbursements (tax certificates, couriers, faxing and long distance calls)

9.       $333 Reimburse Seller pre-paid property tax

10.     $6,694 Total Closing Costs.

1.  The Lawyer fee can vary between different law firms and lawyers.  The cheapest is not always the best option.  There is a lot of work a lawyer must do to protect your purchase.  Don’t be shopping at Wallmart for a lawyer.
2.  Title search can vary in price, basically the lawyer has to check to make sure there are no liens or judgements against the home and you are taking it over free and clear. 

3.  Title insurance is to protect you and the lender from unforeseen issues such as a fence built in the wrong place your new neighbour is disputing, a previous owner not being properly discharged from title and it also protects you from fraud.  It is best to discuss this insurance with your lawyer.

4.  Title Registration is basically adding you as the new owner and registering any mortgages or rental items on the property.
5.  One fee that fluctuates from deal to deal is the PST (yes PST) on the CMHC (mortgage insurance premium).  On a 400k home with 20k down that premium would be $10,450.  This added to the mortgage balance so $400k - 20k + 10.45k = $390,450 mortgage.  Now the PST calculated at 8% of the $10,450 is $836 which will be added to closing costs.  MortgageInsurance

6. There is also land transfer tax to be calculated.  On a 400k purchase land transfer tax is $4,475, but let’s assume we have a 1st time home buyer who receives the 2k discount.  Land transfer tax is now $2,475 to be added to the closing costs.  
7.  Most of the time when a home is purchased with 5% down the lender will pay property taxes on the clients’ behalf, added to the mortgage payment.  They will pre-pay these on or just after closing for up to 3 months.  Which in this case will be $333.33 X 3 = $1,000 added to closing costs.

8.   There can also keep disbursements which are basically additional costs the lawyer may have come across and the basics such as tax certificates, couriers, faxing and long distance calls.  Let’s put these at $450 for this deal.

9.  One last thing is the adjustments.  This mainly comes into play when the seller has pre-paid their taxes.  If the seller has pre-paid a month in advance that means the new buyer will have to reimburse the seller $333 which will be added to closing costs as well.  This amount may be adjusted from the three month pre-payment to your lender.
10.  Bringing in the total at $6,694. Keep in mind it is virtually impossible to give an exact quote of what closing costs will be.  Even a lawyer cannot give an exact number until all the paper work is in and ready to complete a day or two before closing.

Regardless of what closing costs actually are the lender will require documents showing that you have 1.5% of the purchase price in your bank account.  On a $400,000 home, that would be $6,000.  Along with the 5% down of $20,000 you would need to show ownership of $26,000.
Feel free to contact me if you have any questions or concerns.  Or need someone to help you with your mortgage needs.

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