After sellling our house last month we have been busy packing and getting ready to move.  Last week we met with our mortgage specialist and lawyer to finalize the sale of our house and finish the process of buying a house.

As a careful money manager I was anxious to get all of the finances sorted out so that I could update our budget.

Home buyers are advised to set aside 1 – 3% of the purchase price of their house for closing costs.  These fees are vaguely explained during the selling process, but it is helpful to ask questions so you fully understand how closing costs can impact your budget when buying and selling your house.

Here’s a closer look at the 4 hidden costs of buying a house:

Buying A House: Legal Fees and Disbursements

You will need a lawyer to complete the purchase of your house.  Legal fees can vary but on average you should allow for $600 – $900 for legal fees and an additional $200 – $400 for disbursements, which include registering the mortgage, completing a tax certificate, and doing a title search on the property.

Throw in the typical lawyer administrative fees for postage, faxing, photocopying and “file maintenance” and the costs quickly add up.

Shop around for the best price.  Some law offices specialize in handling these mortgage disbursements and have cheaper rates.  Ask your bank or mortgage broker which law firm they recommend and then call at least 3 other lawyers for quotes.

A few phone calls can save you hundreds of dollars.  I shopped around and ended up paying $810 for legal fees and disbursements when the next best quote was over $1000.

3 Month Interest Penalty

Because we were in the middle of our 5-year closed term (variable interest rate) and since our new house won’t be ready until August 1st we have to pay a 3 month interest penalty to discharge our mortgage.  This interest penalty will cost us about $1,000 but our bank has promised to refund this amount when we apply for a mortgage on our new house in August.

Even though we will have this amount refunded in a few months I am still including it as a hidden cost because we have to pay for it up front and if we moved our mortgage to another lender we would still incur the charges.

If we were able to find an interest rate even 0.20% below what our bank is offering then we would have definitely considered paying the penalty, since we could make up those savings easily over the mortgage term.

Property Tax Adjustment

This one is really confusing.  If you are buying an existing home, the owners of the house you are buying have paid yearly property taxes to the City.  You will be required on closing to reimburse them for the taxes they have prepaid for the year.  For example if they had paid $2,000 for the whole year and you were closing June 30th you would be required to pay the owner half of the taxes prepaid, or $1,000.

Since we are building a new house, the builder is responsible for the land taxes until our possession date of August 1st.  When our mortgage payments begin we will be paying property taxes for the 2012 year (our bank collects the taxes for us on top of our mortgage payments).

In December we should receive a bill from the City for the portion of taxes we were responsible for in 2011 (Aug – Dec).  This will end up costing us $1,500.

Interest Adjustment Date

Depending on the date chosen by the lender as the interest adjustment (the date the mortgage starts) you may be required to pay interest to the lender from the date the money is required and the interest adjustment date.  The maximum amount would be one month’s interest at the rate of your mortgage.

This means that when we take possession of our house and our mortgage is advanced on August 2nd (1st is a holiday), we will owe interest only from the advance date to September 1st, which is our interest adjustment date.

While this actually sounds like we get to save money for a month, I’m not very keen on making an interest only payment since I want to start eliminating this large debt as quickly as possible.

As you can see, this process can make it difficult to maintain your budget while you determine the costs of buying a house.  Make sure to ask your lender for a detailed description of all your closing costs in advance so they are factored into your overall budget.

One of the best ways to save money when buying a house is to compare mortgage rates.  Use a handy tool like Rate Supermarket to find the best mortgage rates in Canada.

In addition to the above costs, you may be required to have cash on hand
to repay the vendors for taxes they have paid in advance. In addition,
your lender may also request that you pre-pay a few months taxes as well.
A good rule of thumb is to have enough money to pay six months taxes.

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