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 1^st 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 1^st 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.

 

Ron Miller
905-667-0699
1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Best Mortgage Rates

The purpose of this post is to bring awareness about how dangerous some of the low interest rate mortgages being advertised are.

It is a very wise idea to shop around for the best mortgage rates, after all it can save you thousands over the term of your mortgage. 

Recently a personal friend called about the renewal notice he received from his current lender.  They actually offered him 5.29% for a 5 year term; insane.  We renewed him at 2.99% with friendly terms.  His mortgage was for 200k which worked out to a savings of $15,058 over 5 years.  Even a 0.1% difference could save $616.80 over 5 years, better in your pocket than the banks.

Having said that it is equally important to pay close attention to the terms and to make sure you fully understand what you are signing.  There are many terms to look at, below are a couple of the majors.   

The two major pitfalls you should be looking for are:

     1.  How is the penalty calculated if you decide to break your mortgage?

The majority of 5 year term mortgages are broke before the renewal date arrives.  Knowing this you always want to have an out, even if you do not plan on selling.  Occasionally unforeseen circumstances may arise and you do not want to be at the mercy of a bank.  They show no mercy.

You want to ask your mortgage officer or broker for an example if you broke your mortgage in 2 years what your penalty will be and how it is calculated.  A lot of these discounted rates base the calculation on the current posted rate.  Imagine you signed up for the 2.99% and in 2 years decide you need to sell the home or refinance for whatever reason.  Your penalty could be calculated on 5.29 (current posted rate) - 2.99 (current discounted rate) = 2.30%.  So you will pay a penalty of 2.3% on your remaining mortgage balance for 36 months.  If for example you have a 200k mortgage, your penalty could potentially be $13,800.  Pretty damn scary.

There is no set way that any lender must base their penalty calculations.  To protect yourself always ask what the comparison rate will be in case you do have to break your mortgage.  Generally what you are looking for is a comparison rate that is fair and based on current discounted rates.  For example if you decide to break your 5 year 2.99% in two years your want to see your lender comparison rate be the current 5 year discounted rate or the 3 year discounted rate.  With interest rates as low as they are now, most likely you will end up with just a 3 month interest penalty.  If the comparison rate is the posted rate, run and run very fast, this is not a good deal.

     2.  Is your mortgage going to be registered as a collateral mortgage?

Please click on the link for a little more detail on what a collateral mortgage is.  In a nut shell, they are bad bad bad.  The only people who should be obtaining a collateral mortgage are people in a strong financial position.  

Quick scenario ~ Let's say you have a 200k mortgage and a bank signs you up with a collateral mortgage.  Then they offer you a line of credit to go with it, you also get a car loan and a Visa down the road.  Now your renewal date has arrived so you decide to shop around because you were offered a lousy rate, say 5.29%.  A broker offers you 2.99%, great lets get started.  At some point it is discovered you have a collateral mortgage and didn't even know it.  Well a collateral mortgage is not transferable, it must be handled as a refinance (lawyer fees).  Also we now find out your line of credit, car loan and Visa are all charged against your home.  The only way to handle your file is if you pay off all your other debts against the home first or throw all the debts into the new mortgage.  Problem!!!  There is not enough equity to refinance everything and you don't have enough available cash to pay out all the other debts.  Guess what???  Yep you guessed it, you are going back to your original lender and accepting the lousy rate.  You have been euchred, not a good feeling.

Remember, terms are just as important as rate. 

I really hope this posts will help out a lot of people, I am a little dramatic in this one but it is so crucial that you are getting your mortgage from someone that is trustworthy, as well knowledgeable in the industry.   And wants to see repeat business and referrals from your friends and family in the future.  Use a good and reputable mortgage broker.

Please reply or discuss, ask some questions.   

Till next time, have a great day!

Ron Miller

905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker

Fixed or Variable? How About a 4 Year Fixed?!

                                                 You can view all my videos on You Tube at HamiltonBroker. Feel free to subscribe.

Currently there are big changes going on in the Canadian mortgage world.  We have discounts on the variable rates disappearing and the 5 year fixed is at an all-time low.  When we look at what is available right now, 2.75% on the variable and 3.39% available on the 5 year fixed, the decision on what to choose in my mind is obvious, the 5 year fixed.  Some people may still be stuck on the variable right now but is it really worth it?

Approximately 83% of the time through Canadian mortgage history the variable rate has proven itself to be the best deal over the fixed.  What I believe may happen in the next couple years is the 17% of the time that fixed is the best deal, is going to happen.

Now let's say you are still stuck on the variable.  There is another choice, it is the 4 year fixed rate.  Currently hanging around 3.09% makes it a really good deal.  You are protecting yourself from variable increases as well you are taking advantage of the low fixed position.  With the lower payment you can also decrease your amortization in order to pay down the mortgage faster, still with a reasonable monthly mortgage payment.

When you take into consideration that the average life of a 5 year term is around 3.6 years it is not necessary to take the long road with the higher rate.  With the Bank of Canada claiming they are not raising Prime until 2013, and remember the World economy is still uncertain, it may be longer.  Taking the 4 year term allows time to see what is going to happen as the Canadian mortgage world changes.  And if you do decide to break a 4 year term, the worst case usually will be a 3 month interest penalty.  If you have to take a small penalty to save thousands it is certainly worth it.

Well why not just take the variable then?  Remember, you usually do not get the banks best discounted rate when you switch from variable to fixed, a common calculation for this switch is Prime plus 1.00% or higher.  Right now that would put you at 4.00%, when the current five year rate is 0.70% below that it is not a good deal.  It is common to refinance when considering switching from variable to fixed, the small penalty saves you a lot of money.

To conclude, while in the middle of change it is best to take the road that will do the least damage if you make the wrong decision and having said that, the 4 year fixed is the best decision because you really can't lose.  It allows you time to wait and observe to see what the next trend will be.

Any questions or you want to talk to me about mortgages, feel free to contact me whichever way works best for you.

Ron Miller
905-667-0699

1-855-684-8326
ron.miller@butlermortgages.com
YouTube Hamilton Broker
@HamiltonBroker