Apr 13, 2022
Published by Derek Timmons

Closing Costs: What They Are and Why They Matter

The home buying process is extensive—and it can get overwhelming, especially for first-time buyers. It’s not as simple as finding a home you can afford and paying for it. There’s a lot more to it than that.

Having money for a down payment on a home is not enough to secure the sale. There are other expenses you’ll encounter along the way. And one of these is the mortgage closing costs that every buyer must settle before getting the keys to the new home.

Let’s dig deeper into what mortgage closing costs really are.

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What Are Closing Costs?

Closing costs are all the charges you incur when applying for a mortgage. These can range anywhere from professional fees for your realtor and lender to origination fees for your loan.

Closing costs are broken down into two main categories—property-related and mortgage-related costs.

Property-Related Costs

When applying for a mortgage, your lender will usually order a home appraisal. This is a part of the loan application process to determine the actual value of the property. A home appraisal helps the lender assess whether the property is worth the amount you’re borrowing.

Home inspections are not required, but doing so will help you a lot. Hire a home inspector to assess the property for any damages or issues that might need to be addressed before the sale pushes through.

Home appraisers only assess the house’s value while home inspectors assess the condition of the house. These are two different jobs that people often mistake to be the same.

Another property-related cost is a title search. This is another thing handled by your lender. A title search helps make sure that the title for the property is clean and has no issues. It also ensures that the seller actually owns the property and that there are no outstanding liens for it.

In line with the title search, you might also have to pay for title insurance. This is an extra security measure in case you encounter issues with the title after the sale has been finalized. Lenders usually charge for title insurance to protect them for this very reason. You may also opt to apply for title insurance if you want, but it’s not required on your part.

Mortgage-Related Costs

Lenders charge an application fee when you sign up for a loan. This covers credit checks that look into your credit standing to make sure you’re eligible for a mortgage. The application fee also covers the administrative fees that go into processing your loan application.

In line with mortgage application processing, lenders also charge an origination fee that goes into the creation of the loan. This covers the preparation of documents, notary expenses, and the like. An origination fee usually costs around 0.5% of the amount you’re borrowing.

If you have a down payment of less than 20% for a home, your lender will require you to apply for private mortgage insurance. This only insures the lender in case you default on your mortgage. It doesn’t cover home insurance.

Another extra that you can avail of is discount points. This allows you to lower the interest rate on your mortgage by paying a higher amount upfront. One discount point is equal to 1% of the total loan amount. If you apply for a $400,000 loan, you can buy one discount point for $4,000. You can always buy more points to further lower your interest rate. But this works best if you plan on living on the property for long.

If you worked with a mortgage broker to apply for your loan, you’d also have to pay their fee. A mortgage broker fee can range anywhere from 0.5% to 2.75% of the total purchase price of the home.

What is the Average Closing Cost on a House in Canada?

In Canada, the average rate for closing costs is around 2–5% of the purchasing price. This means that if a house costs $500,000, you can expect to pay around $10,000–$25,000 in closing costs.

For a $500,000 home with a down payment of 20%, you’d have to prepare at least $100,000 for the down payment alone. But factoring in closing costs, the safe amount that you should have secured is at least around $125,000.

Closing costs are necessary expenses for every buyer, although there are also fees covered by home sellers. In some cases, you might be able to get the seller to cover some of the closing costs like insurance premiums or property tax deposits.

But usually, only the realtor fees of both the seller and buyer are covered by the seller. You can always try to negotiate closing costs with the seller. But in a seller’s market, you might find it hard to get them to agree.

To lower closing costs, you can also look around for lenders that waive certain fees or offer discounts. If you’re a first-time homebuyer, you can also look into down payment assistance to help manage your budget.

Other Property-Related Fees You Should Know

There are other property-related fees that factor into your closing costs.

One of these is property taxes. Upon closing, you usually have to pay around two months’ worth of property taxes.

There are also land transfer taxes that need to be covered. In Alberta, people have to pay land transfer and mortgage registration fees instead of a land transfer tax. There’s a base price of $50 for each fee. For land transfer registration fees, there’s an additional $2 for every $5,000 property value. For mortgage registration fees, there’s an additional $1.50 for every $5,000 of the total mortgage amount. These rates are much lower than the land transfer tax rates of other provinces in Canada.

If your property is a condo unit or it belongs to a gated community, you might also have to pay for association fees and homeowners insurance fees. These are usually paid in one lump sum upon closing.

Professional fees should also be covered in closing costs. These include fees for your attorney, realtor, mortgage broker, and insurance agent. Professional fees are for all the professionals you’ve hired to assist you in the home sale.

Preparing for the Closing Day

closing cost explained

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The closing day is a big day for every homeowner. It’s the culmination of all the efforts that went into making sure that the home sale pushes through. Closing costs may take you by surprise, especially if you haven’t accounted for them. But by preparing for these well before the closing day, you can enjoy the process until you finally have the new house keys in your hands.

Canada has a great real estate market in 2022. If you’re looking to finally buy your first home, there’s no better time than now to look for your future home. Place a competitive offer and secure the property before the rates start to go up again.

Again, here are the closing costs you should prepare for when buying your first home:

  • Property-related costs. These include a home appraisal, home inspection, title search, and title insurance.
  • Mortgage-related costs. These include application fees, origination fees, mortgage insurance, discount points, and mortgage broker fees.
  • Other costs. These include property taxes, land transfer taxes, association fees, homeowners insurance fees, and professional fees.
Written By

Derek Timmons

Derek is a top performing REALTOR® in Airdrie, Alberta, Canada. Aside from knowing the market, he uses his knowledge and experience in construction to help clients understand exactly what they're in for when buying and selling real estate.