What Are Closing Costs? An FAQ for Home Buyers

The payment of closing costs is one of the last things that happens during the home buying process. For a home buyer, it's important to understand what closing costs are and how much they'll cost. Home buyers who go into the process with this knowledge are often more prepared to buy a home.

What Are Closing Costs?

Closing costs are the administrative fees associated with certain steps of the home buying process. Closing costs can vary depending on where the house is, how much it costs and other factors. Still, most home buyers pay between 1.5% and 4% of the purchase price of the home in closing costs. Budgeting for this money up front can help home buyers who are just starting process of purchasing a home.

When Are Closing Costs Paid?

Closing costs are paid on the last day of the home buying process. On that day, all financial transactions are handled by the lawyer. After all financial transactions have been settled, the attorney transfers the keys to buyer. From that point forward, the home is considered purchased and the buyer may finally move in.

What Type of Administrative Fees are Included In Closing Costs?

The type of fees that get paid as a part of closing costs vary from one home sale to the next. Home buyers who need to know how much they can expect to pay in closing costs should talk to their mortgage lender, attorney and insurance agent. This will help the home buyer estimate the costs that he or she can expect to pay. Some of the expenses that home buyers often end up paying as a part of their closing costs include the following.

Land Transfer Tax

The land transfer tax is a percentage of the home's purchase price. In some areas, this tax is administered by the city as well as the province. Since this varies by region, the best way to find out what the land transfer tax will be is to talk to an attorney.

Real Estate Lawyer

Most home buyers elect to hire a real estate lawyer to help them through the legal aspects of the purchase process. This attorney helps the home buyer by drafting the paperwork, looking over the documentation and checking the title. The lawyer is the person who usually gives the key to the home buyer at the end of the transaction. Often the lawyer is around $1,500.

New Home Warranty Fee

A new home warranty is only applicable for home buyers who are purchasing a newly constructed home. The home warranty is often included as a part of the cost of the new home, although some home builders expect the warranty to be purchased separate from the home payment. The new home warranty protects against major structural defects, defects in workmanship, problems with appliances and problems with the building's envelope.

The new home warranty fee functions much like a homeowners insurance policy, but is not the same as this type of policy. Even home buyers who get home insurance may still want to get a home warranty if they're choosing to build their own house.

Title Insurance

Title insurance is a type of insurance that protects the homeowner from loss if the ownership of the home is ever disputed. Although title disputes are not common, title insurance is inexpensive enough that many people will get it anyway.

Provincial Sales Tax on CMHC Insurance

CMHC insurance is the mortgage insurance that is required on home purchases where less than 20% is put down to purchase the home. Typically, a homeowner will pay for their mortgage insurance as a part of their normal monthly mortgage payments. However, some areas require the sales tax on the mortgage insurance to be paid with the rest of the closing costs.

When Can Closing Costs Paid By the Seller?

Closing costs are typically paid by the seller during a "buyers market." A buyer's market is a market condition that occurs when the housing inventory is high and buyers have their pick of homes. During a buyer's market, it's difficult for homeowners to sell their properties, so sellers must make concessions to buyers in order to sell their home. 

Buyers who want the seller to pay their closing costs can make this happen by adding this into the home purchase agreement. Typically, the real estate professional will add this into the contract to ensure it's done correctly. 

Work With Your Real Estate Agent

If you're a home buyer thinking about purchasing a home, now is the time to contact a real estate agent in your area. A good real estate agent with knowledge of the market can help you from the initial offer to the close of the sale. Your real estate agent can help you determine what your closing costs will be and help you work with the various other people involved in the home sale to finalize the sale process. For more information about what kind of closing costs you can expect to pay for a Bearspaw home when the time comes, contact your real estate agent today.