4 Hidden Costs When Buying And Selling Your House
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. | ||||||||||
I got caught in this trap last year when I had to move in a hurry and just went with the most convenient legal team. I actually made out pretty well considering, but I’m sure I could have saved some money. In fact, if there is one bit of advice I would give anyone doing the whole moving/house shopping thing it would be to start EARLY! Don’t get caught up against deadlines with people at the bank, lawyers etc. Be prepared to start the process and have a ton of patience with calling back repeatedly to make sure your applications don’t get pushed to the back of the line.
Also, if your home/condo is part of an association, you’ll have to pay for any pre-paid association dues that might have been paid. In our case, the seller had just made the annual payment about two months prior, so we had to pay the other 10 months at closing. Wasn’t a big deal but this can be a line item that might catch you by surprise, and it could be significant in a condo complex where there might be larger assessment bills for repairs or what not.
I’d argue that the first two are not hidden very well. 🙂
In Toronto, the water bill is paid twice a year. I recall the lawyer making some sort of adjustment for that. The amount wasn’t significant however.
@My University Money
Good point to start early, the closing date sneaks up on you really fast.
@Money Beagle
Condo fees and property taxes can definitely catch you by surprise if you aren’t prepared.
@Mike
Maybe the lawyer fees aren’t very well hidden, but I was surprised by the interest penalty since there was no mention of it until about a week ago.
Speaking of hidden costs though, another thing that caught me by surprise yesterday when I met with the lawyer was the Real Estate agent sent their commissions in at $3,000 higher than what was in our contract. If I didn’t catch it and get them to follow up and fix it I would have been out that money.
Do you think that was deliberate?
Wow – a $3,000 error is quite a bit. Suspicious!
That reminds me that another hidden cost when I sold my first house was the GST on top of the realtor commission.
I think I negotiated the fee down to 4.75% (down from 5%). The fee worked out to about $14k but then the GST was almost a thousand bucks.
I guess that cost wasn’t hidden either, but I didn’t know about it and you can be sure the agent never mentioned it.
Yeah, I was suspicious for sure. The only reason it could be a legit error is because we were in a unique contract where our home builder was paying for the selling fees and we were just responsible for the buying agent’s fees.
So it should have been a 2.5% commission (plus GST), and instead it came in at 3.75%. Big difference!
My agent was actually upfront about the GST.
But I bet I won’t be able to find the hidden cost that the builder charged me to cover their portion of the realtor fees 😉
I don’t know if Lethbridge does this, but where I live you can prepay your property taxes in a lump sum before the end of January for a 3.5% discount. Most people can’t do it because they don’t have the money, but it might be worth looking into.
@Mike – last summer we didn’t sell quite quickly enough (the renos took a month longer than expected) and we got dinged with nt just the GST but the HST as well. Now, we did expect it but it was unpleasant nonetheless! Luckily our realtor lowered his seller agent commission by .5% which made up for the additional tax.
hmm…scary. these kind of things keep anyone who’s unprepared in a kind of trap. I’m yet to buy a house so i’m on the lookout. thanks
Let’s not forget that the Home Buyers Plan is not as good as it seems. There can be huge penalties to withdraw your RRSPs. We followed all the rules but mistakenly assumed that our money could be withdrawn at no cost to us.
Not exactly “Hidden” costs. Every house owner knows how much he/she pays for each of these every month. After I paid off my house loan, I sort of naively thought I’d have all that money in my pocket, but these things just keep eating away at it. Nevertheless, paying of the house loan is still the way to go.
I am a real estate lawyer; and, I am actually 25-30% higher than my nearest competitor. However, 95% of my deals will close on time; I am willing to pay my staff overtime at my cost and I am willing to see people evenings and weekends and I have a 24 hour telephone service. We recruit top talent, send them on on annual courses, have deployed the latest in technology and have a group benefits plan to help with both recruitment and retention. The worst files I see are from the bargain basement lawyers. In fact, one gentleman advertises his closing at $200.00 in fees when mine are $1200.00; however, if it is a closing of less than three weeks away, tack on $100.00; if he has to order title insurance or a compliance certificate, tack on $100.00 (and you always almost have to order one or the other unless it is a new home or empty lot); if, he has to pay out more than one payout (mtg, loc etc) add on $100.00 per payment; if he has to order a tax certificate, tack on $50.00 (which you always have to do). He has somethng like 15 add-ons which cost $50-$100 each and at least ten of them are necessary. So he ends up being within $200 of me and sometime more. Most of his clients come to me the second time around. And, yes, I make a lot of money being a real estate lawyer, more than most, and I make no apologies for it; my dentist does not make apologies for what he makes nor does my family doctor. In fact, many of my client are Alberta Oilfield client and their base pay is what I make in a good year. So, be careful, the cheapest deal isn’t the best. Ask for referrals, find someone experienced and someone reputable….every week there is almost 1 lawyer in the province being disbarred, mostly stealing from trust or a culmination of bad things…..
We tried selling our house a few years ago but were unsuccessful. But, now we have renters and the income covers our mortgage, taxes and insurance so we feel good about it.
As a Realtor I can tell you that it is often a good idea to ask your agent about who is good to use in the area. They can even give you a couple names so you can shop around to more than one person.
Not sure what it is like elsewhere but here in Ontario if the Realtor was going to get a referral fee they have to disclose it in writing to you. I don’t take referral fees, I just refer to people I trust to get the job done and help make the deals go smoothly for all parties.
Even if its through no fault of my own, it still pains me to see a client get in trouble from hiring the wrong lawyer, home inspector, moving company, etc… just because they wanted to save a few dollars. More often than not it pays long term to pay the initial money upfront than to go for the cheapest one at the onset.
Peace of mind is worth money.