While most new home purchases go through without a hitch, you can get thrown for a loop if you're not prepared for the closing costs. You know you have to save for a down payment of at least five percent to purchase, but you can’t forget to budget for all the other expenses you’ll have to pay on the day you get your keys.
Here's what you need to know:
What Will You Have to Pay?
Closing costs can vary depending on the situation, but here are some of the types of costs you can expect to pay:
Those who have less than 20 percent for their down payment usually have to pay mortgage insurance; a type of insurance that protects the bank should you default on your mortgage loan. Most of the time this is a part of the monthly mortgage payment. Note, the first month's payment is commonly collected at closing.
There are legal costs associated with putting together all of the paperwork (e.g. transfer of Title, registration, disbursements, etc.) that makes your home purchase official. These costs are generally paid on closing day. Many builders today will cover these costs for you.
You usually have to pay the first year of the property taxes upfront. After the initial payment, contact The City of Calgary about their TIPP program so can you pay on a monthly basis instead of an annual lump sum.
You will likely be asked to show proof of insurance when you close. There are many options for coverage available so think carefully about your needs.
If you’re moving into a building that uses condo fees to cover the costs of maintaining shared spaces, you’ll probably have to pay the first month's fees at closing.
How Much Will You Need?
Excluding the down payment, most homeowners pay between one and four percent of the cost of the home in closing costs . On a $300,000 condo for example, this is between $3,000 and $12,000.
When Do You Pay Closing Costs?
When purchasing a move-in ready home, the closing day is usually around one to two months after you make the initial agreement to purchase the home. This is how long it takes to finalize all the paperwork. When you’re building a brand-new condo, though, the closing costs will be due when the home is ready. This could be several months or even a year (if you purchased early) after you initially agree to make the purchase.
How Can You Pay Closing Costs?
Most of the time, the bank will require you to pay the full amount of your closing costs using a money order or cashier’s cheque. They will not allow you to put a portion of the costs onto a credit card and you’re not usually allowed to pay with a personal cheque. Money orders and cashier’s cheques ensure the funds are in your account and before the closing meeting, the lawyer will give you an exact figure.
Always ask the bank for a full estimate of how much you’ll need at closing. Nobody wants to be surprised by a figure they can’t afford. The exact number might change slightly, but the difference should be no more than a few hundred dollars.
Budgeting for Closing Costs
It’s only in shopping for a home you start to get a true sense of how much your closing costs will be. For instance, if closing costs on the types of homes you like are generally around $7,000, you can wait until you have that money (in addition to the down payment you need) saved up. You could also adjust the amount you put toward your down payment in order to cover this amount. For instance, if you have a ten percent down payment saved, you may find you need to reduce it to seven percent and use the remainder for closing day.
Closing costs are an important (and sometimes overlooked) part of the home buying process. By asking a lot of questions about your responsibilities and factoring those costs into your calculations, you’ll be in a comfortable position on closing day.