If you’re buying a home for the first time, it’s easy to overlook closing costs. Closing costs are often referred to as the “hidden costs” of real estate for the simple fact that they aren’t always obvious. When you’re buying a home, you’re probably already aware of the deposit and down payment, but did you know that these additional expenses can add up to thousands or tens of thousands of dollars? This comes as a shock to a lot of first-time homebuyers and rightfully so. Closing costs usually add up between 1.5% and 4% of a home’s purchase price. For instance, on a $500K home, you could spend upwards of $20K on closing costs. Still think they’re no big deal?
Now that you understand how much closing costs can add up to, let’s take a closer look at the most common ones you could face when buying a home.
You’re most likely making the single biggest financial transaction of your lifetime when buying a home, so getting a home inspection only makes sense. You want to make sure you’re investing in a rock-solid home, not a dilapidated one.
A home inspection is a visual examination of a property by a certified home inspector. It’s a good way to see if there are any major issues with the property you may have overlooked. A home inspection is money well-spent. If you find any major issues that need costly repairs, you may be able to negotiate a lower purchase price with the seller, or have them repaired on the seller’s dime.
Although the fee depends on the company and the property type, you can expect to spend about $500 on a home inspection.
Real Estate Lawyer
The real estate lawyer is what I like to call the unsung hero of buying a home because he does a lot of the important legal work that goes on behind the scenes. Your lawyer will review your purchase agreement, the status certificate (if you’re buying a condo), and ensure the home’s title is clear from defects and liens. They will also purchase your title insurance and register the home in your name, calculate the land transfer taxes, and prepare the statement of adjustments and mortgage paperwork. In the end, the real estate lawyer gives you the keys to your new home.
It’s a good idea to choose your lawyer ahead of time, and make sure you find someone who specializes in real estate (e.g., not an immigration lawyer). A good real estate lawyer is worth every penny.
In terms of cost, you can expect to spend about $1,500 on a real estate lawyer, although this varies, depending on their hourly rates and type of transaction (i.e., you might have to pay more if it’s a private sale).
Land Transfer Tax
The government wants its share of the action when it comes to real estate, and it gets a piece of the pie through the land transfer tax when you’re buying a home (i.e., transferring the title from the seller to the buyer, you).
How much you’ll pay in land transfer tax depends on where you’re buying as well as your home’s purchase price. The land transfer tax can easily add up to tens of thousands of dollars. (You’ll even pay a second land transfer tax, a municipal land transfer tax on top of the provincial one, if you’re buying in Toronto.) The good news, if you’re a first-time homebuyer, you’ll usually get a rebate on some or all of the land transfer tax.
Don’t worry; you won’t need to calculate the land transfer tax yourself. Your real estate lawyer will take care of that for you and let you know how much you owe on the statement of adjustments.
Other Closing Costs
- Appraisal Fee: Your mortgage lender will most likely require that you pay for an appraisal. The cost is about $300.
- Changing the Locks: If you’re like most homebuyers, you’ll want to change the locks for security reasons.
- Renovations and Repairs: Be sure to budget money towards anything that you’d like to repair, change or renovate right away.
- Moving: Do you plan to move yourself or hire movers?
- Furniture: Do you intend to buy any new furniture for your new home?
By planning ahead, you can ensure you haven’t put every penny towards your down payment and have the necessary money set aside for your closing costs and other issues that require urgent financial attention.
This is a guest post by Sean Cooper, the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist, Money Coach and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail, Financial Post and MoneySense. Connect with Sean on LinkedIn, Twitter, Facebook and Instagram.