Down Payments vs. Closing Costs in a Real Estate Transaction

Down-payments are often confused with closings costs. Here are the differences between the two.

Down Payment

A down payment is an amount lenders require you to come up with yourself. This amount will be applied towards the purchase price together with the mortgage funds received from your lender. The amount is usually calculated as a percentage of the purchase price.

Lenders generally require you to come up with a minimum down payment of 5% of the purchase price although this amount may be higher depending on the terms of the mortgage. It is often a requirement that the money used for you down payment cannot be borrowed.

Closing Costs

Closing costs represent the total costs involved in completing your purchase. These will include the amounts that are debited from the purchaser such as: the purchase price, Property Transfer Tax and GST, if applicable, title insurance, the cost of obtaining confirmation of insurance coverage, and legal fees and disbursements.

Amounts that will be credited to the purchaser and applied against the debits include mortgage proceeds and the deposit paid to the real estate brokerage, if applicable.

There will also be adjustments between the parties, be it a debit or credit, depending on the date the transaction completes. Annual property taxes will be adjusted along with utilities or strata fees, if applicable.

The difference between the amounts credited and debited to a purchaser will indicate the amount that they must pay to their lawyer in order to complete the purchase. These funds are often referred to as the balance required to complete, and represent both the closing costs and down payment. In most cases, the balance required to complete must be provided by way of a bank draft.

The seller will be responsible for payment of the real estate commissions, their legal fees, and the amount required to payout their mortgage and any other financial charges on title, if applicable. These amounts will be paid out from the sale proceeds and the balance will be paid to the seller.

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