Canadian home buyers often put a lot of time and effort into studying their mortgage options and calculating their monthly mortgage payments based on all of the variables involved. But one thing many Canadians may forget about is the added cost of closing fees.
According to the Canada Mortgage and Housing Corporation, home buyers can expect to pay between 1.5 per cent and four per cent of your home's purchase price in closing costs.
What are closing costs?
Closing costs are the extras related to buying a home that aren't included in the home's price and are usually due on closing day. They can include title insurance, lender's inspection fees, credit report costs, legal fees, transfer fees and mortgage insurance. Home inspections, land surveys and appraisal fees are sometimes considered closing costs, because they are up-front payments involved in the home buying process that are not related to the mortgage. Homeowner's insurance, property taxes and pre-paid interest may also have to be paid before closing. Other closing costs include fees that have been paid by the seller that may need to be reimbursed such as property tax, utility bills and condominium fees.
How can I lower my closing fees?
There are many ways for home buyers to reduce their closing fees, including:
1. Extra closing fees on a number of documents may be labelled as "administrative" fees, and home buyers can request to have them reduced or waived. It never hurts to ask.
2. No-fee mortgages are available, where the bank will waive some closing fees but charge a higher interest rate. If you only intend to live in the home for five years, this may be a cheaper option because the added interest will be lower than the closing costs. However, If you plan on living in the home for at least 10 years, it might work out to be more expensive.
3. Save up a larger down payment for your home. Mortgage insurance is required when taking out a mortgage for a home with less than a 20 per cent down payment. Mortgage insurance payments may be added into your monthly mortgage payments, which means more money paid out over the life of your mortgage, or increased closing fees. Try to take the time needed to save up a larger down payment if possible.
4. Title insurance protects the bank when there is a problem with the property, like a boundary discrepancy, after the purchase closes. In some cases, the lender or bank may charge the buyer title insurance and the seller for title insurance, when only one title insurance policy is necessary. Redundant charges and services like these can be protested.
5. Asking the seller to pay closing costs when buying a home has become quite common in recent years, which can be done by including this stipulation in writing within the offer letter. There are different maximum amounts of closing costs that the seller can pay, for example: on a 10 per cent down payment the seller can contribute six per cent of the total cost of the home, but if the down payment is less than 10 per cent the seller can only pay three per cent.