Closing Costs: What Every Home Buyer Needs to Know

Closing costs can cause stress for home buyers. In addition to being costly, closing costs can be difficult to estimate. Knowing what closing costs are, how much you can expect to pay and when closing costs are due can help you plan for this part of the home buying process.

What Are Closing Costs?

Closing costs are the costs associated with legal and administrative actions that occur when a person buys a home. Closing costs can run anywhere from 1.5 to 4 percent of the purchase price of the home, depending on the location of the home and the various administrative actions that occur during the sale process. Each home purchase is different, so closing costs are different every time.

Who Pays Closing Costs?

Closing costs are primarily paid for by the buyer. However, there is at least one closing cost that is paid for by the seller: the real estate agent's commission. Sellers pay for the real estate agents on both sides of the transaction. Commission is divided into half and is split between both parties. Sellers also pay the lawyer fees and the mortgage discharge fees, if they've closed the mortgage before it matures.

Sometimes in a tough market when a seller wants to attract a good buyer, the seller may consent to pay all closing costs for the buyer. This makes it possible and easier for first-time home buyers to manage the expenses of buying a new home. Sellers can control which of the closing costs they plan to pay. Buyers who cannot afford to pay closing costs on their own may negotiate that with the seller. 

What Charges Do Closing Costs Consist Of?

Closing costs consist of a variety of charges that must be covered by the home buyer. Not all of these charges will apply to every home purchase, so you'll need to talk to your insurance agent, mortgage lender and lawyer throughout the home buying process to determine which costs will apply to you.

Title Insurance

This insurance protects against a loss if the property ownership is ever disputed. This type of insurance typically costs between $100 and $300.

Land Transfer Tax

This tax is a percentage of the home's purchase price. Some areas impose municipal tax in addition to provincial tax.

New Home Warranty Fee

Home warranties protect homeowners against defects in newly built homes. In some cases, the home warranty is included in the cost of the home, in other cases the warranty must be purchased separately.

Real Estate Lawyer

The real estate lawyer helps manage paperwork throughout the home buying process. Lawyers prepare the paperwork, check the title and other documentation to ensure that the home is ready for sale, and when everything is finalized, the lawyer hands the buyer the keys to their North West Calgary home. A typical lawyer will cost around $1,500 per home sale.

Provincial Sales Tax on CMHC Insurance

CMHC insurance is the default mortgage insurance required on home purchases with less than 20 percent down. The price for this insurance is wrapped up in the normal monthly mortgage payments, but some provinces require the provincial sales tax to be paid up front. This sales tax is due with the rest of the closing costs.

When Are Closing Costs Due?

Closing costs are due when the purchase process is nearing its completion. On closing day, the financial transactions are managed by the lawyer. When this is done and all money has changed hands, the lawyer gives the keys to the home buyer. It's at this point that the home is officially considered bought.

Work With Your Real Estate Agent

Closing costs can be confusing. Knowing how much you owe and to whom is a challenge for many home buyers. The best way to ensure that you have enough money budgeted for closing costs is to work with a reputable real estate agent. He or she can help you estimate your closing costs and can also put you in touch with professionals who can answer your questions. To find out more about closing costs and to get started with the home buying process, contact a reputable real estate agent in your community.