Quick Summary
Most home buyers are focused on the price of a house and the interest rate they could get on their mortgage agreement. While being informed about these costs are important, they are not the only expenditures you will encounter towards your home buying experience.
A closing cost does not cover the listed purchase price of the real estate. Knowing and understanding what closing costs are and how much they will be on average will help you lessen any unforeseen fees when you move into your new house.
Closing Cost Explained
A closing cost is any fee charged when you take out a property on mortgage. You are required to pay this charge whether you plan on buying a new house or decide in refinancing your property.
The closing cost typically ranges from 2% to 5% of the total mortgage. This means that if you have a $400,000 home purchase then you would pay somewhere between $8,000 and $20,000 as its closing cost.
All closing costs are shouldered by the buyer. However, some real property agencies will agree to share in the payment of these fees which are to be repaid by the buyer depending on the conditions stipulated in the mortgage agreement.
The following are things you need to familiarize yourself with prior to exchanging your hard-earned money with the dream house you want to purchase.
Not only will these save you from exorbitant fees but also lift you from shouldering home buying loans for bad credit.
- Appraisal
To ensure the home is worth the price, an appraisal will be mandated by the lender. Most appraisers charge from $300 to $500 for their services. Appraisal costs vary depending on several factors like the size of the house, the condition of the property, the current market value of the lot, and the number of levels or floors of the house.
- Lawyer Fees and Disbursements
It is normal for lawyers to get involved in real estate contracts. Your lawyer will execute some paperwork to ensure that you are entering into a fool proof agreement.
Disbursements cover any spending that your lawyer shoulders to pay for the legal work on your part. Legal fees vary depending on the level of difficulty of the work required and can be between $600 and $1,000.
- Land Transfer Tax
Land transfer tax applies when a property is transferred to the home owner or buyer. The cost is different in every province in Canada and is based on the price of the property. Closing cost for land transfer tax typically ranges between 0.5% and 1% of the total purchase price.
- Home Inspection Fee
Home inspection is executed by a professional inspector that does vital checks to any related issues of the house like pests, insects, plumbing, electrical, insulation, and/or presence of any harmful materials present in your house (i.e. UFFI or Urea Formaldehyde Foam Insulation) and presents recommendations for any necessary repairs. Fees range between $300 and $500.
- Home Insurance
Home owners are required to have property insurance in place upon closing the mortgage contract. Your house can be insured against fire, earthquake, fortuitous calamities, man-made events, and other serious damages.
Your home insurance valuation is dependent on its real property value and not on its current market value. Corresponding fees are based on the insurance coverage applied to your home.
- Title Insurance
Your title insurance protects you against fraud or any issues with your property title and/or survey. If these fees are not included with the legal services charges then you will pay an additional $250 to $400 for the issuance of your title insurance.
These charges vary depending on the insurance company and these fees are paid either by the seller or by the buyer prior to the closing of your mortgage agreement.
- Mortgage Default Insurance
If you have put less than 20% for the down payment (known as a high-ratio mortgage) then your lender will require you to apply for mortgage default insurance. Lenders usually add the premium to your mortgage if your down payment is less than the minimum amount required.
The more intricate the risk, the higher the premium is assigned to your contract.
(NOTE: You can consider this as your life line on mortgage programs for bad credit. Having this insurance to back you up will save you from costly fees arising from default repayments.)
- Moving Expenses
You can actually do it on your own and could save money. However, if you have a lot of heavy stuff to transport or you need to move in quickly then you need to hire professional movers to assist you with all the packing and help get things done easier.
Mover fees depend on truck size and relocation, to name a few.
- New Construction Housing Fees
Newly constructed and extensively renovated homes may be subject to GST (goods and services tax) or HST (harmonized sales tax).
(NOTE: You can request for a national free credit report by visiting any local government unit servicing your county or region in Canada to help you plan ahead on your new housing construction.)
The Federal Housing Administration
The Federal Housing Administration provides mortgage insurance on loans made by FHA-approved lenders. FHA loans are intended for low-to-moderate-income borrowers that only require a lower credit score and a lower down payment than most traditional loans.
Check your credit history to determine what mortgage option suits you the best. If you have a bad credit score then do the all necessary steps to improve your rating over time and do not lose hope.
There are a number of excellent mortgage programs available at your disposal or you can consider consulting a mortgage professional for best financial advice.
Final Thoughts
Closing costs are unavoidable upon purchasing your home and you can up spending more than you bargained for. However, if you research about these beforehand, compare competitor rates, analyze your budget, and decide on a mortgage professional to manage your transactions then you can save money from paying these charges.
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