Posted by John Doe
Your home will be among the biggest purchases of your lifetime and requires a great deal of commitment. There are several hidden costs when purchasing a home and having knowledge about the financial cycle of your mortgage will ensure that there aren’t any surprises along the way that could leave you financially strapped.
The Life Cycle of a Mortgage
There are five stages in the life cycle of your mortgage, the first of which begins as soon as you apply for your mortgage. The life cycle of a mortgage includes Application, Processing, Underwriting, Closing and Servicing/Repayment. However, not all of these stages require financial obligations. Therefore, we will skip to the segment of the mortgage’s life cycle where the most significant fees are involved.
Once the funds for your mortgage have been secured, the closing stage of your loan will take place. Typically, these closing costs are the “hidden costs” that you may not have realized you needed to pay. Keep in mind that there is no set closing fee, but depending upon the cost of your home, this fee is generally 2-5% of the total price of your home. The following costs are typically involved in this stage:
- Deposits and Down Payment
Deposits usually accompany your offer, but they will eventually go toward your down payment. A down payment is the money that is paid upfront. The minimum down payment is generally 5%, but you will be in a better financial situation if you can put down a larger sum of money.
- Mortgage Default Insurance
If you made a down payment of less than 20%, you will have to get mortgage default insurance. Premiums in various provinces, including Ontario, Quebec and Manitoba, also have provincial sales tax that will need to be paid during closing.
- Interest Adjustments
Whether or not you have to pay interest adjustments will depend upon your closing date. For example, if you will make your monthly payment at the beginning of the month but the closing date of your house isn’t until the middle of the month, you will be required to pay the amount that accumulates in this period, which is called the Interest Adjustment Date (IAD).
- Lawyer Fees
You can expect to spend anywhere from $500 to $2,500 on the legal fees associated with purchasing a home. You will also have to reimburse them for additional fees that they may have covered, including property searches, for example. If your real estate agent hasn’t recommended a lawyer, it is important that you find a reputable one. Without one, you could end up spending thousands of dollars trying to fix mistakes.
- Land Transfer Tax
This is a provincial tax that is anywhere from 0-2%. Some provinces don’t require that you pay this tax; you will pay smaller land transfer fees instead. First time home buyers in certain provinces can get a rebate on this land transfer tax. You can find a land transfer tax calculator online to find an estimate of how much you might have to pay. Depending on where you live in Canada, you may also have to pay a municipal tax, too.
There are a variety of searches done at the administrative level that are often necessary parts of the home buying process. This includes title searches, which ensure that the seller is legally able to sell you the property. There are also execution searches, a tax search, an unregistered easement search, a property search and utility searches. The fees for these searches are generally under $100 and you may have to pay for up to six searches.
- Title Insurance
Title insurance is in place to protect the lender from potential losses. Although this fee is not always required, you can expect to pay between $150 and $500.
- An Appraisal Fee
This ensures that the lender isn’t letting you borrow more than the property is worth. In most cases this fee is covered by the lender, but if this isn’t the case, you can expect to pay anywhere between $250 to $500.
This part of the cycle is the longest and could last anywhere from 15 to 30 years, depending upon how much you borrowed, as well as the type of loan you have. During this segment of your mortgage, you will be responsible for paying either bi-monthly or monthly payments. You will also be responsible for paying for homeowner’s insurance; on average Canadians spend $840 every year on home insurance. You will also be responsible for paying for taxes and any other terms that were agreed to previously.
If you are looking to buy a home, Mortgages, Mortgages, has a range of mortgage options. Contact us today for more information.