Closing Costs Guide: Everything You Need to Know

Closing costs—it’s that one real estate term no one likes to hear. They are often expensive and can leave you feeling frustrated.

So, let’s talk about closing costs.

In this short closing costs guide, you’ll learn what they are, what you should expect, and other key details that will help you understand what they go towards.

What Are Closing Costs?

Closing costs are the various types of administrative and legal expenses that accompany a real estate transaction. These fees are paid when a transaction closes and you prepare to take legal ownership.

When it comes to buying, closing costs range between 1.5 and 4% of the total purchase price.

There are also a few notable cash outlays that will be required before your home closes. We’ll go over those as well, so you aren’t caught off guard by sudden expenses.

Expenses You Will Pay Before Closing

Even though they’re not technically considered closing costs, you should still be aware of them. The following costs are required before you can close on a property:

• Deposit: Your deposit shows that you’re a serious home buyer. It indicates that you have the financial means to buy the home and that you’re alright with a small level of risk until it closes. The deposit is typically non-refundable and counts towards the down payment. However, deposits can be returned in specific scenarios, like if the conditions in a conditional offer aren’t met.
• Home inspection fee: It’s highly recommended that you hire a home inspector to look over any property you plan to purchase. You can even list this as a condition in your initial offer. Home inspections typically cost less than $1,000 for a standard home, but can vary depending on the size of the home.

Closing Costs Covered by the Home Buyer

What other close costs should you expect to pay when purchasing a home? We’ve prepared a list of the most common expenses you should expect to pay.

• Land Transfer Tax: All provinces have a Land Transfer Tax (LTT) payable on closing, with the tax rate varying by province. This tax is a percentage of the purchase price. Some municipalities also have an additional LTT, such as Toronto. However, first-time homebuyers buying a condo, townhouse, or home in Toronto can receive up to $4,475 off the total of their land transfer tax.
• Legal fees and disbursements: Expect to pay a minimum of $500 in legal fees to cover the preparation of all the documents required to buy a house.
• Title insurance: Almost every lender will require title insurance. This type of insurance protects against any losses if there is ever a title dispute. You can purchase this through your lawyer. It typically costs between $100 and $300.
• CMHC mortgage loan insurance: You will also need to purchase CMHC mortgage loan insurance if your down payment is less than 20% of the home’s purchase price. Your costs will depend on the size of your down payment.

Let’s unpack the CMHC mortgage loan insurance a little bit more.

Let’s say you purchase a $500,000 home with a down payment of $25,000 (5%). You will need to pay $19,000 in CMHC insurance over the lifetime of your mortgage.

And depending on what type of home you purchase, there may even be additional expenses you need to cover, such as:

• Septic tank: Any property with a septic tank should include a test to guarantee that it’s in working order and does not need service. This price can be negotiated with the former owner.
• Water tests: Any home with a well will require a water test to make sure the water is potable and adequate. You can also negotiate this fee with the previous owner.

Additional Costs You Should Know About

To ensure that you’re fully prepared for buying your next home, let’s briefly go over other costs that may come into play as you’re buying your home.

• Property insurance: This insurance must be in place before you can close on the home. It can usually be paid monthly or annually, making it a closing cost that can be reduced upfront.
• Utility bills: You may need to reimburse the previous owner for anything that’s already been paid since they won’t be using it. This could include utilities and property taxes.
• Property taxes: The tax you pay will vary based on the municipality, but it will also be a percentage of your home value. If property taxes have already been paid for the full year by the previous owner, you’ll likely need to reimburse them at closing.

What to Expect on Closing Day

The day has finally arrived for you to take legal possession of your new home. Most of the administrative processes should be completed by this point, including transferring the full down payment to your lawyer. Keep in mind that these transfers can take time, so do them before the closing date.

When the day finally arrives, your lender will release the funding to your lawyer, who will then ensure it is applied towards the purchase of your home. You will also need to ensure your down payment has been provided, plus any other closing costs. From there, your lawyer pays the previous owner, registers the name to you, and provides you with the keys and deed to your new home.

Congratulations homeowner! You did it.

Ready to Purchase Your First Home? Let’s Get Started!

Don’t be afraid of closing costs—they are a necessary part of the real estate process.

Are you looking for a reliable partner to help you navigate the home purchasing process, closing costs, and everything else? I can help. Get in touch with me today, and let’s explore your options.