The costs of buying and selling a home

Got your down payment? Good, now be prepared for the other costs associated with buying a home.

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It’s a very exciting time, closing your first home. I remember quivering like JELL-O when I had to sign the papers for my first solo house purchase. Young and naive, I thought I had dotted all the i’s and crossed all the t’s, but I still had some surprises in store.

The costs that snuck up on me back then are still sneaking up on new home buyers today. Perhaps it’s because down payments grab all the focus. Yes, the down payment is the biggie, but you better be prepared for the other costs associated with buying a home.

Loads of folks make no provision for the $600-$900 in legal fees and the $300 or so in disbursements we have to pony up to a lawyer even though we know, at least in theory, that we’re going to need a lawyer to close on the deal. If you go with a lawyer who makes his living closing real estate transactions, chances are you’ll pay less because he’ll have streamlined the system. But don’t take my word for it. Check with your mortgage broker, friends and family for referrals.

Most people who have never bought before have no idea what the “property tax adjustment” cost is all about. It’s simple really. If you’re buying a home from George, and he’s already paid property taxes on the property for months you’ll be living in it, so you’ve got to pay George back for the money he’s already sent in. You’re responsible for the property taxes from the date you take possession, and this is calculated by the lawyer and paid back to the seller as part of the transaction.

Another cost that throws new buyers is the “interest adjustment date.” The maximum this can be is one month’s worth of interest, but most often it is less. If your mortgage is advanced (sent to the lawyer to pay to the seller) on June 14, you’ll owe interest from that date until the date your first mortgage payment comes out of the bank (likely July 1). It’s a good idea to ask your lender to calculate your interest adjustment so you know what to expect.

If you’re selling a home before your mortgage term is up for renewal, you’ll likely have to pay an interest rate penalty, sometimes called a LIC (lost interest compensation) or IRD (interest rate differential). This is the fee the lender is going to charge you for breaking the mortgage early. Hey, a deal is a deal, and if you break the deal you shouldn’t be surprised that you have to pay. Sometimes it’s three months worth of interest. Sometimes it’s much worse. If you’re selling and then buying, and planning to break an existing mortgage—as opposed to taking it with you to the new property—you better have a handle on just how much this is going to set you back.

6 comments on “The costs of buying and selling a home

  1. Another interesting and valuable article to be shared with my clients and friends. Thanks moneysense!

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  2. There are also other fees a potential buyer needs to be aware of. If buying a resale you will certainly want a home inspection done by a qualified individual. If you are buying privately the mortgage lender will want an appraisal done. Along with bank statements to show you have your down payment saved (and are not borrowing it from a credit card etc) lenders want proof you also have saved about 2% of the purchase cost for the closing costs. In addition to lawyer fees and their costs you have to pay the land transfer tax. In Toronto the city tacked on their own land transfer fee also.

    If you are buying a rural property additional costs can be incurred. If the home is heated by oil, the buyer will have to pay for the oil tank to be refilled. If there is a well you will want an inspection done to check the flow rate and the septic tank checked as best that they can. Extra costs associated with buying ahome can certainly add up quickly.

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  3. Having just recently purchased my first home, I can attest that there are plenty of fees most first-time buyers are clueless too. Luckily, we had some extra money in the bank to take care of them, but people should be careful and aware of them.

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  4. Great article. And if one lives in the Toronto area, there is of course tax issues (Land Transfer Tax). Our soon to be deposed mayor, Rob Ford, campaigned on the promise to remove the Cities' land transfer tax, but of course, he never did (must be a politician). And if one is buying a re-sale home, there are often costs associated with repair and upkeep with the first few years of home ownership. I see my clients sometimes struggling with these associated costs, so, the best bet is always to have a good plan in place, and discuss these issues with your realtor, accountant, and mortgage professional.

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  5. You don't mention the biggest expense; the commission charged by the realtor you hire. I live in a very modest 60 year old, 1400 sq ft bungalow, and was told the standard realtor rate was going to cost me about $20,000. That gave me a real sinking feeling! I still don't understand why the commissions are so high. And there's no realistic alternative except to put my house up for sale myself.
    Wasn't it just last year the Canadian real estate industry was taken to task for allegedly operating in an unfair manner to keep commissions high and to keep Canadians from buying ads in MLS to sell their homes on their own? It was a government office that negotiated this, wasn't it? I wonder if things changed for the better?

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  6. yeah this is very interesting and besides you can learn the difference between the cost of buying and selling. Thank you for this.

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