Don’t Forget About The Closing Costs!
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For anyone who wants to earn a little extra money on the side, real estate can offer the perfect opportunity. No matter what level of experience you have in this area, chances are you can make a decent side profit from real estate. There are, of course, many different ways of earning money through property. Probably the easiest, and most common, is to acquire property and then rent it out. This can be a great way of getting into the real estate game. And getting your foot on that ladder is often the most difficult part. However, it is not the only option available, by any means. You also have the opportunity to buy property and flip it. Most often, this will involve significant improvements of the property in order to add value, while at other times and depending on the circumstances, it might only mean refreshing the ascetics of the home with zero structural or other major updates.
Whichever kind of real estate venture you end up finding yourself in, certain things remain the same. One of the most important things to bear in mind at every step of the way is the financial constraint. There is a lot to consider in terms of the money you need to pay out. And you will need to make sure that you have taken it all into consideration if you want to get the process right. With that in mind, we are going to look at some of the major costs involved in the process of buying a house. For now, we will not even concern ourselves with the other parts of the process. Let’s jump straight to the closing part of the real estate transaction to review what costs there are to consider. No matter what your financial situation is, you need to know what to expect and the closing can really put a dent in your budget if you don't know what to expect.
First of all, what do we mean by closing costs? To put it simply, these are the costs which come at the end of the whole property buying process. It sounds simple enough, yet it can be surprising how quickly items add up to the thousands, or tens of thousands of dollars. Some of these fees apply to all typical property closings, while others might not always happen. You should always check in advance of making a real estate purchase so that you're not caught off guard and put in a position of scrambling, trying to secure additional money that wasn't planned for.
There are some closing costs that are incurred by the buyer, and some that the seller has to pay.
- Deposit and/or down payment. The rule of thumb is about 20% of the purchase price to be exempt from otherwise mandatory provincial mortgage insurance. Down payments can be less than 20%, but lenders have tightened rules since the financial crash of 2008 for obvious reasons. The deposit is usually a part of the offer to purchase and is presented to the seller when you want to purchase the property. It shows the seller that you’re a serious buyer and is held in trust until the closing date, at which point it becomes part of the down payment.
- Legal fees, which can run into the thousands. This will cover the execution searches and registration of the mortgage and deed. Smaller items will also be part of the fee, including couriers, certified cheques, photocopying, etc. When getting an estimate for a real estate lawyer, make sure to get as detailed of a breakdown of costs as possible.
- Home inspection. If there has been any inspection of the property, which there likely will be, this is another fee the buyer must pay, which can range from approximately $1,000 to $2,000
- A survey fee, if required, which is generally provided and funded from the seller's side.
- Land transfer tax. This can be surprisingly huge, so it is important to bear this one in mind in particular.
- Realtor fees - typically 5%, which is broken down by 2.5% and 2.5% for both the buying and selling agent. The seller is responsible for paying these fees.
- Estoppel Certificate- if you’re buying a condominium, most jurisdictions require an Estoppel Certificate. An Estoppel Certificate outlines a condominium corporation's financial and legal state of affairs. It can include bylaws, rules and regulations, insurance information, the balance in the reserve fund, the legal description of the unit, information about any legal filings, judgments against the condominium corporation, special assessments and insurance claims. The certificate is usually in the $100-$200 range.
More About Land Transfer Tax
Let’s take a closer look at the Land Transfer Tax. First of all, what exactly is it? To put it simply, the land transfer tax is a tax payable by the buyer of a property. You pay it to the province when the transaction itself closes.
Depending on where you live, closing costs will probably be between 1.5-4% of the purchase price of the property. Luckily for Calgarians, buyers in Alberta and Saskatchewan don’t pay land transfer taxes, but smaller land transfer fees instead.
There are two major parts to the fee: one on your home’s value and the other on your mortgage amount. The rates for the two parts are as follows:
- On the property value - $50 base + $1 for every $5,000 thereof of the property value.
- On the mortgage - $50 base + $1 for every $5,000 or part thereof of the mortgage amount.
Don't Get Caught Off Guard
Educating yourself and researching is the the best advice to make sure you're armed with the proper knowledge of what to expect in closing fees. It's a good idea to keep a sizeable chunk of money aside to ensure you have all costs covered. Keep in mind to budget for items items that may not be included in the actual property, such as appliances and window coverings. Making a real estate purchase is a very involved process and it would be a great idea to reach out to a mortgage broker for free advice to make sure you have all of the bases covered.