A lot of my clients approach me with questions about closing costs. Although they are an important part of the mortgage application process, first-time homebuyers in particular aren’t aware of exactly what the mortgage closing process entails. Many underestimate the final cost that can accumulate from the various fees and taxes that come together to form your closing costs. Being prepared and informed will make the process of securing a property with a mortgage easier than you think. I’m Jodi Habel, a licensed mortgage broker with over a decade of experience in the Ontario area, and in this article, I’ll answer some vital questions regarding mortgage closing costs, such as what are closing costs and how much are mortgage closing costs on average in Canada.
What are the closing costs?
Applying for a mortgage can be a daunting process, as you may already be aware. Various aspects of that process are associated with different fees, along with additional costs that come into play when you secure the home or property you want with a mortgage. All of those costs accumulate to form the mortgage closing costs you need to pay at the very end of the closing process. Many people think mortgage closing costs refer to when you finish paying your mortgage in full, but that is not the case. The closing costs need to be paid once the property ownership is transferred to you.
How Much Are House Closing Costs?
How much you will pay in closing costs varies on the cost of your house, the individual fees you will be charged, and your location. All of those factors can impact the closing cost percentage that you will be required to pay. In Ontario, you can expect to allocate anywhere from 2-5% of your home’s sale price in closing costs. For example, when you purchase a house valued at $500,000, you may be expected to pay anywhere from $10,000-20,000 in closing costs. If you want to determine the costs of your specific case, it’s best to not generalize and utilize a mortgage and closing cost calculator instead.
What Do Mortgage Closing Costs Include?
What is included in the home mortgage closing costs that require several thousands of dollars of expenses from the home buyer’s end? First, there’s the mortgage application fee — the application that kickstarts the mortgage eligibility process (around $200-500 depending on the lender). Additionally, the closing costs include all of the inspections and home appraisals that you requested in order to determine the condition of the property before purchase. If your down payment is less than 20%, you will most likely be required to purchase insurance as well, along with hiring a real estate lawyer. Finally, taxes make up the majority of the closing costs, including a property tax adjustment and land transfer tax.
Here is a comprehensive list of closing costs you can expect to be included in your final closing costs total:
- Legal fees;
- Property tax adjustment;
- Land transfer tax;
- Appraisal costs – typically paid COD prior to closing, if applicable;
- Home inspection costs – typically paid COD prior to closing, if applicable;
- Lender fees, if applicable;
- PST on the mortgage default insurance premium, if applicable
Can Closing Costs Be Rolled Into A Mortgage (Canada)?
Unfortunately, closing costs are considered one-time payments and typically cannot be rolled into your mortgage, becoming a portion of what you pay in monthly mortgage payments. That is why it’s vital that you be aware of the closing costs on a house at the beginning of your mortgage acquisition process in order to avoid surprise expenses. Rolling your closing costs into your mortgage is only applicable to those who are refinancing their mortgage or if you have a mortgage that is providing cash back. The cash back option can be applied towards your closing costs. However, keep in mind that rolling your closing costs into the mortgage is not always a better tradeoff since, in that case, you will need to pay interest on that amount for the duration of your amortization period.
How Are Closing Costs Calculated?
As we covered, closing costs are a combination of accumulated expenses like fees and taxes that depend on the specific property you purchase along with the conditions of your lender. You can calculate the closing costs yourself if you know how much each individual fee will cost you. In any case, your lender is required to give you an estimate of the closing costs towards the beginning of the mortgage application process once your request is approved. A few days before when you’re required to sign and pay for the costs, your lawyer will present you with the final costs that shouldn’t stray too much from the initial estimate.
How Can I Decrease My Closing Costs?
There aren’t too many ways in which your closing costs can be reduced. However, if you are considered a first time homebuyer you might be eligible for a land transfer tax rebate which is determined by your real estate lawyer. The cashback option provided by lenders could be another option to utilize to help cover your closing costs.
Still have questions or concerns? Get in touch with me today and I’ll help connect you with the mortgage that suits your needs and financial standing. And don’t forget to calculate mortgage down payment and closing costs with my mortgage calculator — free of charge.