How closing costs are estimated
Closing costs fall into four groups, following the layout of the federal Loan Estimate form:
- Lender charges — origination fee and any discount points, each a percentage of the loan amount.
- Third-party services — appraisal, credit report, title insurance, settlement or attorney fees, recording. These vary by provider and location, so the defaults are clearly example amounts, not averages. Replace them with the figures on your Loan Estimate.
- Prepaids and escrow — calculated from your inputs, not guessed:
Prepaid interest = loan × rate ÷ 365 × days until month end Escrow deposit = (annual property tax + annual insurance) ÷ 12 × months of reserves First-year insurance premium (often paid at closing) - Transfer taxes — a percentage of the price where your state or county charges them to the buyer.
Freddie Mac says closing costs typically range between 2% and 5% of the purchase price; the calculator shows the equivalent range on your loan amount so you can sanity-check the total.
Worked example
A $350,000 home with 10% down ($315,000 loan) at 6.5%, 1% origination, the example third-party fees, 15 days of prepaid interest, two months of escrow and the first-year insurance premium:
| Lender charges (1% of loan) | $3,150.00 |
|---|---|
| Third-party fees | $3,650.00 |
| Prepaid interest (315,000 × 6.5% ÷ 365 × 15) | $841.44 |
| Escrow deposit (2 months tax + insurance) | $819.17 |
| First-year insurance | $1,800.00 |
| Total closing costs | $10,260.61 |
| As % of loan | 3.3% |
| Cash to close incl. down payment | $45,261 |
How to lower closing costs
- Compare Loan Estimates from at least three lenders — sections A and B are where lenders differ.
- Shop for the services the Loan Estimate lists as shoppable (section C).
- Negotiate seller credits, especially in slower markets.
- Closing near the end of the month reduces prepaid interest, although it does not change your total interest over the loan.
You will receive a Closing Disclosure with final figures at least three business days before closing; compare it line by line with your Loan Estimate.
Frequently asked questions
What percentage of the price are closing costs?
Freddie Mac says they typically range between 2% and 5% of the purchase price. The exact figure depends on your loan, location and providers.
Why are prepaid items part of closing costs?
They are not fees; they are money you would pay anyway (interest, taxes, insurance) collected in advance. They still have to be paid in cash at closing.
Who pays transfer taxes?
It depends on the state and on the contract. In many places the seller pays; in some it is split or paid by the buyer.
Sources
- Freddie Mac, “Understanding homebuying costs,” My Home by Freddie Mac (accessed September 2026)
- Consumer Financial Protection Bureau, “Loan Estimate explainer”
- Consumer Financial Protection Bureau, “Closing Disclosure explainer”
- Consumer Financial Protection Bureau, “What are (discount) points and lender credits and how do they work?”
- U.S. Census Bureau, American Community Survey 2024 1-year estimates, table B25103 (median real estate taxes paid) and table B25077 (median value, owner-occupied units)