What You Need to Know About Closing Costs

Buying a home is one of the significant financial commitments one can make when planning for the future. The decision starts with saving money or securing a loan to buy a home and ends with paying monthly mortgage interest and other home maintenance fees. However, what

most new homebuyers must remember to budget for the mortgage closing costs, which are sometimes surprisingly high.

So, what are closing costs, and how do they impact the overall cost of the house? 

Who pays the closing costs when finalizing the real estate transaction? This article breaks down what's included in the closing costs and how much a seller or homebuyer pays.

What Are Closing Costs? 

Mortgage closing costs are expenses or fees above the property's price that a home seller or buyer pays to complete a real estate transaction. They include costs related to the property, those paid to the mortgage lenders, and other services involved in the transaction.

How Much Are Closing Costs in Toronto, Canada

Closing costs typically vary depending on several factors. These include the price of the home, location, the type of real estate transaction, and tax differences between cities and towns.

When buying a home in Toronto, you must budget at least 2% of the home's price for closing costs. That means, when planning to buy a home worth $1,000,000, you must set aside at least $15,000 for closing costs to qualify for a Canada Mortgage and Housing Corporation-insured mortgage.

Closing costs also increase when buying and selling a home simultaneously. For instance, when completing two transactions simultaneously, you must have at least 4% of the total home's price available as closing costs. You will also need access to further emergency resources to complete the transaction.

You can determine how much you will need as closing costs using the mortgage loan estimate, which shows your mortgage terms and expenses. Alternatively, you can use a

closing disclosure is issued at least three business days before the closing date.

Who Pays Closing Costs

Both the buyer and sellers can pay closing costs when settling the transaction. However, the buyer pays most of the costs, while the seller pays some fees such as real estate commissions

and transfer taxes. As a buyer, you can negotiate with the seller to pay some of your closing costs, but that is only possible if the seller has other offers.

Some of the closing costs paid by the buyer include:

? Land transfer tax: Land transfer taxes vary based on the purchase price of the home and the location of the home.  

? Legal Fees: The buyer will need to hire a real estate lawyer to handle the legal aspects of the property transaction, including reviewing the purchase agreement and conducting a title search. Lawyers fees range from $1200-1700.

? Title insurance: Lenders will always ask for title insurance from borrowers to protect the buyer against any issues with title, liens or encumbrances. The cost for title insurance ranges between $250-$500 for Residential Properties. This price may vary based on the value of the property and the title insurance company you choose.

? Home inspection: It is highly recommended that buyers have a home inspection before purchasing a property to identify any potential issues that may need to be addressed. Home inspection costs vary by house size and lot size. On average, a residential property can cost $300-$600, which is well worth discovering all the potential issues before securing a property. 

? Appraisal fee: The appraisal fee is paid to the licensed appraiser who determines the home's value, which is at least $300-$600 on average for a residential property.

? Mortgage insurance: If a buyer's down payment is less than 20% of the purchase price, they must pay CHMC high ratio mortgage insurance. The CMHC Mortgage Loan Insurance premium is calculated as a percentage of the loan and is based on the size of your down payment. It can run anywhere from 0.60% to 6.50%

? Property tax adjustment: The buyer must reimburse the seller for prepaid property taxes. This amount will vary depending on the property location and that city or town as set by the government of Ontario. 

? Moving costs: The buyer will also need to budget for the expenses associated with moving into their new home, such as hiring a moving company or renting a moving truck. Prices vary based on how many people are required to help with the move and the number of hours needed to complete the move. On average, rates can run anywhere from $80-150 per hour for two people. 

Some of the closing costs paid by the seller include:

? Realtor commissions: A seller pays a real estate agent's brokerage to represent them when closing the deal. This fee can vary based on what services the real estate agent you select is providing you with. This rate is hard to estimate as fees differ and can be a percentage of the final sale price, a flat fee or a combination of both. Choose your real estate agent wisely; you get what you pay for.  

? Legal Fees: The buyer will need to hire a real estate lawyer to handle the legal aspects of the property transaction, including reviewing the purchase agreement and preparing the necessary documents to facilitate the transfer of ownership. 

? Mortgage discharge fee: If the seller has an existing mortgage on the property, they will need to pay a discharge fee to the mortgage company to release the property from the lender's lien. 

? Prorated property taxes: If the seller has paid property taxes for the entire year, the buyer must reimburse the seller before owning the property.

? Repairs and maintenance: Sellers may need to make repairs or perform maintenance on the property to ensure it is ready to show or as required by the purchase agreement.

? Capital gains tax is only applicable to investment properties, not your principal residence, which is exempt. If the property has increased in value since it was purchased, the seller may be subject to a capital gains tax on the profit of the sale. In Canada, 50% of any capital gains value is taxable. Should you sell an investment or asset at a higher price than you paid, you'll need to add 50% of that capital gain to your income.

How To Lower Closing Costs

Closing costs can add up quickly and become a financial burden if you do not plan for them in the initial purchase stages. Fortunately, you can negotiate the costs and lower them using the following hacks:

1. Shop Around

Before securing a loan or settling on one offer, compare the prices and interest rates of different brokers/lenders. This will help you find competitive sale terms and interest rates, as well as affordable third-party services. 

2. Roll Closing Costs into Your Mortgage

Some lenders can agree to pay all your closing costs or roll them into your mortgage. However, prepare to pay higher interest rates since such lenders tend to pay themselves for absorbing your closing costs.

3. Schedule The Closing at The End of The Month

Pushing the closing at the end of the month can reduce prepaid daily interest charges. As a borrower, you can ask the lender to run the scenario so you can determine how much you can save in the end.

The Bottom Line

Mortgage closing costs are as significant as the down payment when buying a home. These costs can be expensive if you do not plan for them. But they can also become affordable if you budget for them before buying or selling your home. Therefore, understanding how these

fees can impact the transaction, which is crucial for both sellers and buyers who want to experience a smooth closing process and avoid unexpected financial burdens.