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How to Budget Closing Costs for a Home Purchase

Forgetting to budget for closing costs is one of the most common mistakes new homeowners make

 

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By:
Steve Harrison,
Mortgage Broker

If you are thinking of buying a home, you’ve probably started saving for the down payment. But have you considered how much you will need to save for the closing costs? If you haven’t, you are not alone. 

What are Closing Costs?

Closing costs are all the fees you will need to pay when the sale of the home or property is finalized. Some expenses are mandatory while others are optional, but before looking for a new home, it is important to talk to a mortgage broker about all of the financial obligations that come with buying a home. Your professional mortgage broker will explain what fees you will have to pay so that you can plan your closing day budget.

Why It Is Important to Save for Closing Fees

Not planning for closing fees will create unnecessary and unwanted financial challenges. Homeowners who are unprepared for closing day fees are often surprised, frustrated, and stressed by the additional expenses they’re asked to pay. Before buying a home, ask your broker about all of the fees that you’ll have to pay in addition to the mortgage.

Financial experts recommend saving between 1.5% to 2% of your home’s total value on your final mortgage closing costs. For example, if you are planning to buy a house for $600,000.00, you will need to save between $9,000.00 to $12,000.00 for your closing costs, such as land transfer taxes and legal fees.

Mandatory Closing Costs

Mandatory costs are the fees you have to pay on the closing day, such as lawyer fees, land transfer fees, homeowner’s insurance, and mortgage insurance taxes (if applicable).

You might also be responsible for paying prorated property tax and utility bill monies to the previous owner if they have prepaid these expenses. That would be outlined by your lawyer in your statement of adjustments.

Optional Closing Day Fees

Optional mortgage fees are expenses that you might have to save for, but they are not necessities. Moving costs, some utility hookup fees, changing the locks to your new home, renovations or upgrades, purchasing household items, pest control inspections, and unexpected repairs are all considered optional closing costs.

Photo by Douglas Sheppard on Unsplash

Buying a home can be expensive from start to finish. From deposits to closing fees, home buyers must save enough money to cover all the costs associated with purchasing a property.  Speaking to a mortgage broker before you start looking for your first home can help you plan for all areas of the purchase so that you can set realistic financial goals for your home purchase.

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