Don’t Let These Unexpected Closing Costs Catch You Off Guard

First-time homebuyers often face unexpected closing costs, such as property tax adjustments, mortgage interest adjustments, and PST on mortgage-default insurance. Property taxes can be unexpected due to the seller having already paid for the full year, or the mortgage lender taking a fixed amount from the bank account along with every mortgage payment. Mortgage interest adjustments can be unexpected due to the stub period between the closing date and the beginning of the first payment cycle. Your lawyer should explain these costs when you sign the papers. The interest adjustment date for a mortgage loan can vary depending on the lender.

Some lenders will set the first payment exactly one payment period after the purchase completion date, while others may prefer to collect from you on the first day of the month. If the down payment is less than 20% of the purchase price, mortgage-default insurance (MDI) must be purchased to protect the lender in case you fail to maintain your mortgage payments. If the down payment is less than 10% of the purchase price, the one-time MDI premium is 4% of the loan amount, but must come from the borrower's own pocket and cannot be added to the mortgage. The MDI premium is usually added to the core mortgage balance and repays over the life of the mortgage. The most important details in this text are the three items that could become surprise closing costs when buying a home.

These include mortgage insurance (4% of the initial mortgage loan amount), PST on the MDI premium (8% PST of $33,400) and property taxes (direct or indirect). These items can add up to more than $6,000, but the actual costs will be different for each buyer. It is important to understand which of these items might pertain to your circumstances and to ask your real estate lawyer, mortgage broker and real estate agent for information.