Wondering what the differences are between closing costs and a down payment? How do they affect you when buying a home? In this episode, we discuss the differences between the two, how closing costs are applied when buying a home, what home builders may cover. Finally, we also look at differences between the two regarding new and resale homes.
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Hi, everyone, and welcome to another edition of Homebuyer's School.
I'm joined by Troy Champ, a Mortgage Advisor with Mortgage Tree, , and today the question we're gonna answer is:
Are down payments and closing costs the same?
Troy Champ: [00:00:30] Hi, Karl.
No, down payments and closing costs are different.
So a down payment is your equity in the home.
If the purchase price is under half a million.
If the purchase price is between 500,000 and a million, you have to have 5% of the first 500,000, and 10% of any amount over 500,000.
Karl Yeh: Okay.
And if a purchase price is over a million dollars, it must be a minimum 20% down, but a lot of lenders will require more than 20% to mitigate risks of the [00:01:00] high purchase price.
And the down payment is absolutely not included in the actual purchase price of the home.
No, so a down payment is your equity in the home.
So your mortgage is calculated based on your purchase price, less your down payment, which is your equity, and that's what left, so that's your mortgage amount. Plus any insurance premiums that would be added onto that.
Karl Yeh: So another question that people have always asked is,
Where is the down payment included in the closing costs?
So down payment and closing costs are two separate items altogether.
Closing costs is a term that banks come up with, [00:01:30] and that's your cost to be able to take possession of the house.
So, in Alberta, the most common closing costs are lawyer fees.
Those range anywhere from $1100 to $1500. Moving expenses, would be another closing cost.
Karl Yeh: Would that be like, home inspection?
It could be a home inspection, for sure. That could be one.
But moving, just physically moving your home from one home to another home, that's gonna be a closing cost for you.
There's a standard number that the banks use. It's 1.5% of your purchase price, towards closing costs.
Karl Yeh: Okay. [00:02:00] And that doesn't change between different builders, or it's usually just-
Well, many of the builders will pay for your legal fees for you.
So that's no longer a closing cost.
So if we can verify that your builder is paying for your legal fees, we can remove that from the closing cost calculation. And in Alberta, we don't have what's called a land transport tax.
Karl Yeh: Okay.
So that's common in B.C. and Ontario, where a percentage of your purchase price is paid to the provincial government when you take possession of the house.
We don't have those types of taxes here.
Karl Yeh: [00:02:30]
Is there a difference in terms of the closing costs for a new home versus a resale?
Well, there's still closing costs for the resale, because you're gonna have legal fees, and you're always required to pay your own legal fees on a resale property.
New construction, it's up to the builder whether they've made it an agreement to pay for your legal fees or not. So that's the difference in Alberta.
Karl Yeh: Okay, thank you very much Troy.
Troy Champ: You're welcome.
Karl Yeh: Thank you very much to everyone for joining us, and we'll catch you next time.
So of our other videos that you may be interested in watching related to this topic are:
Let us know if you have additional down payment or home buying questions that we can answer by submitting them in the comments section below.
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About Troy Champ:
Troy is one of those uniquely capable mortgage experts who has refined his craft over 17 years of experience with two of Canada’s major financial institutions and then one of the largest mortgage brokerage firms in Western Canada. He is amongst a rare group of professionals who have funded over $500 million in mortgages over his career and received many top level awards for excellence.
A hallmark of Troy’s service pledge is unparalleled availability. While many will say they provide great service, Troy proves it day in day out without question. His clients are never left waiting for answers to their enquiries. Quite simply, his clients are thrilled to work with someone who says what they do and does what they say.