Closing costs are the fees you have to pay just before you take possession of your new home. Many first-time homebuyers forget about them and find themselves scrambling to get enough money as closing day approaches.
But don't worry!
All you need to do is prepare for these fees ahead of time by getting a deeper understanding of how much they’ll be - and we have all the info you need!
Types of Closing Costs
The term closing costs refers to a hodgepodge of different items. Some of the most common closing costs are:
- Legal Fees for Lawyers - $650 - $1000
- Land title charges and other disbursements paid through the lawyer’s office - $250 - $600
- Home inspection - $300 - $900
- Property appraisals - $200 -$350
- Landscaping Deposit (refundable once you complete landscaping) - $1,000 - $2,500
- Home/Fire Insurance - $700 - $2,000
It’s hard to determine how much these things will cost until you get serious about buying your home. At that point, a good builder will be able to give you some examples of comparable homes, and once you have started to hammer out the details, you’ll be able to get a more accurate estimate of the closing costs.
Some builders offer incentives that include a reduction in closing costs. For example, Sterling Homes covers your legal fees if you use their lawyer.
Property taxes are handled a bit differently and how they are handled depends on the time of year and whether or not the annual invoice has been paid by the Builder yet.
Typically, property taxes are pro-rated and an adjustment is done at closing so the homeowner only ends up paying for the portion of the year for which they have possession of the home.
If possession is earlier in the year, the property tax bills haven’t come out yet so the builder will actually give the homeowner a credit (lowering the amount you have to pay) because later that year the homeowner will be required to pay the full invoice. They essentially pay to the homeowner, the portion for which they owe.
If possession is later in the year (once the builder has already paid the annual property taxes) the homeowner will see an adjustment that requires they bring in more money to cover their portion of the annual invoice.
Example 1 – Annual Property taxes = $2400 and Builder has paid the invoice (possession date Oct 1)
The adjustment will show the annual amount being broken down into days and then multiplied by the number of days the homeowner will own the home in the year:
$2400 / 365 days x 92 days = $604.93 homeowner will owe the builder at closing
92 days is determined by taking calculating how many days there are from Oct 1st to Dec 31st (31 + 30 + 31).
Example 2 – Annual Property taxes = $2400 and Builder has NOT paid the invoice (possession Feb 28th)
$2400 / 365 days x 58 days = $381.37 builder will owe the homeowner at closing
58 days is determined by calculating how many days there are from Jan 1st to Feb 27th (31 + 27).
The homeowner will then be responsible to pay the entire bill when it arrives knowing the builder has already paid them their portion.
Don’t Forget the Down Payment
As you make all of these calculations for the closing costs, don’t forget that these costs are in addition to how much you'll need for your down payment. You will still need to bring a check for your down payment 1-2 weeks prior to closing.
If closing costs are higher than you expected, you might be able to dip into the down payment to cover the costs. But, decreasing your down payment will increase the mortgage amount. In most cases, the bank won’t allow you to do this.
Ask your bank if you’re concerned about the closing costs or would like to use some of your down payment money.
How New Home Buyers Can Save
If you’re buying a brand new home, you may be able to save in a few ways. First, you don’t necessarily have to pay for a home inspection like you would if you were purchasing a resale. Regular inspections are part of the building process. Of course, some buyers still decide to have an independent home inspection, but it’s not a requirement.
Occasionally, builders offer incentives that relate to closing costs. For instance, Sterling Homes covers legal fees & land title charges if you use their lawyers.
Other builders offer flexible financing options that can be a huge help - be sure to ask!
Getting Some Estimates
In general, you can roughly estimate your closing costs to be around 1 to 2 per cent of the cost of the home. Luckily, when you start the buying process, the bank is able to crunch some real numbers and give you a more accurate estimate.
There’s still a bit of fluctuation because the first mortgage payment and the property tax amount might be pro-rated and will change based on the actual day you close on your home, but at this point, the bank’s estimate shouldn’t fluctuate by more than a few hundred dollars.
It’s smart to start thinking about your closing costs beforehand. When you’re in a solid financial position at the time of your purchase you’ll be happier overall. Start saving now, and you’ll soon be ready to buy your new home!