If you have little or no experience in buying a home in Toronto, you may find
the aspect of closing costs and points very confusing. Even those who have
bought and sold Toronto Homes in
the past have a very limited understanding of this part of the process. Some are
not even sure of the actual extent of the costs involved.
The term “closing costs” refers to the fees that a lender requires you to pay
before the mortgage documents can be finalized giving you ownership of the
Toronto home. They amount to a percentage of the amount of money that you borrow
– usually between 3% and 5%. This cannot be confused with the amount of down
payment you make – it is an additional cost that you must factor into your
finances. There are various components of this aspect of buying, which include:
1. The Application Fee. This is a fee
charged by the lender in order to cover the administration costs of processing
your loan application. Lenders have to pay a charge when they request your
credit report and they may or may not pass this cost on to you in the fees.
Another aspect of the application fee is called the loan origination fee, which
many lenders refer to as points. Each point represents 1% of the total amount of
your mortgage.
You do have options with regard to the points, such as purchasing without
points. However, taking this option will mean that you will have to pay a higher
rate of interest on the loan. Depending on the lender you choose, you may also
have the option of paying additional points in order to obtain a lower interest
rate than the one quoted to you.
2. Title Insurance. The Toronto lender
will require you to take out title insurance as a protection for both you and
the lender. This will protect you in the event that it is discovered that the
seller did not legally have the right to sell the property. In the title search,
it is possible that some owners of the property may not turn up in the search or
a creditor may have a lien placed on the property due to unpaid debts of the
seller. Any of these would prevent the sale of the property from going through.
Without such insurance, you would still be liable for repayment of the mortgage.
3. Toronto Home Appraisal. In order to
determine that the home in Toronto that you want to buy is actually worth the
selling price, lenders require you to have a home appraisal carried out. Many
lenders in Toronto have their own appraisers for this reason and will include
the cost in the amount of your mortgage. You can also undertake the task of
hiring your own appraiser and paying the cost on your own.
4. Toronto Home Inspection. While lenders
do not require a Toronto home inspection report, it is good advice for you to
request one. Through such an inspection, the inspector will determine whether or
not there are any problems with the home, such as structural damage, problems
with the electrical or problems with the roof that would cost you money after
you take possession of the home. You can, however, have the costs of this
appraisal included with your closing costs.
5. Toronto Home Insurance. You will not
be able to sign the final mortgage documents without providing proof that you
have a homeowner’s insurance in place. Depending on the requirements of the
lender, you may have to pay the premiums for the first year of the policy in
full. This is a cost that you do have to pay for on your own and is rarely
included in the amount of money that you can borrow.
6. Private Mortgage Insurance. The usual
amount of down payment required by lenders is about 15% to 20% of the purchase
price of the Toronto home. This is money that you must come up with on your own.
Some lenders do have policies in place to make it easier for first-time home
buyers by requiring only 5% of the price as a down payment. In this case you
will have to take out private mortgage insurance, which the lender will arrange
for you. This is insurance on the amount of the down payment so that the lender
has protection just in case you default on the loan.
7. Taxes. One aspect of owning a home is
the taxes that you must pay to the municipal authority. You can have the lender
pay the property taxes for you on an annual basis and this will require you to
pay an extra amount of money in each payment.
8. Legal Fees. Since a mortgage agreement
is a legal document, you must acquire the services of a lawyer to represent you.
The fees paid to the lawyer are included in the closing costs of a mortgage.
9. Interest. Once you sign the final
mortgage documents, interest starts to accrue on the loan. Depending on the
length of time between this date and the date of your first payment, you may
have to pay the additional interest charges.
All the expenses associated with taking out a mortgage are considered to be
closing costs. The points are charged by the lender and have an effect on the
interest rate you pay on the money you borrow. When you have an understanding of
this essential part of the Toronto homes buying process, you will be better
prepared to meet the extra costs involved.