How To Calculate Closing Costs

Closing costs are the one-off charges of creating a mortgage and transferring a property. They are separate from the down payment and are paid at the same time, so the cash a buyer must produce is the sum of the two rather than either one alone.

They fall into four broad groups. Origination and lender charges are priced against the loan, title charges are priced against the property, third-party fees are fixed amounts charged by specific providers, and prepaid escrow is money collected for bills that will fall due later.

Origination fees are usually quoted as a percentage of the loan, commonly between 0.5% and 1.5%. A £280,000 loan at 1% carries a £2,800 origination charge, which is why the fee scales with the price and not with the size of the deposit.

Discount points are the other lender charge worth knowing. One point costs 1% of the loan and typically reduces the interest rate by a quarter of a percentage point. Whether it pays back depends on how long the loan is held.

Title insurance protects against a defect in the ownership history, such as an undisclosed heir or an unresolved lien. The premium is usually a percentage of the purchase price and is paid once, at closing, in most systems.

Third-party fees are services the lender requires but does not perform. An appraisal verifies the value, a survey inspects the condition, a title search checks the record, and the county records the deed. Each is a fixed fee rather than a percentage.

Prepaid escrow covers bills that will fall due after the buyer moves in. Property tax, homeowners insurance and sometimes mortgage insurance are collected months in advance and held in an escrow account the servicer draws from.

The single largest escrow item is often property tax. Ten months of a £4,000 annual bill is £3,333 collected at closing, which is a real cost of the purchase even though the tax was always going to be owed.

As a share of the purchase price, closing costs typically run between 2% and 5%. Cash buyers sit at the bottom of that range because there is no loan to originate and no appraisal to order, while government-backed loans with their extra charges sit near the top.

Closing costs are not free money lent to the buyer. They are paid from the buyer's own funds at closing, which is why a 20% deposit plus 3% of closing costs is a far bigger cheque than the 20% figure suggests.

Some costs are negotiable and some are not. Origination fees, title charges and the choice of providers can often be shopped, while government recording fees and transfer taxes are fixed by law and identical for everyone.

A seller credit can cover part of the cost. In a buyer's market a seller may agree to pay a fixed amount towards closing costs, which reduces the cheque at the table but does not reduce the price and so does not reduce the amount borrowed.

Rolling closing costs into the loan is possible but expensive. Adding £7,500 to the balance at 6% over 30 years costs roughly £8,700 in interest, so the total bill for those costs is well above the headline figure.

The calculator adds the four groups of costs, expresses the total as a percentage of the purchase price, and adds the down payment to give the cash needed at closing. It assumes the deposit is paid in cash rather than financed.