Closing costs are designed to confuse. We'll clear up the mystery — and tell you how to protect against bogus charges.

WHETHER YOU'RE A first timer or have been through the drill half a dozen times, buying a home is a stressful proposition. In addition to the anxiety of sinking what may be your life savings into one huge investment, there's the nagging fear that you're getting ripped off in some capacity.

When it comes to closing costs, that may very well be the case.

Like car leases, closing costs seem to be designed to confuse the buyer. Most folks don't understand all the mysterious fees they're paying their lender when they close on their home — and sometimes end up overpaying, says Keith Gumbinger, vice president of HSH Associates, a mortgage information provider. (For a list of the average amounts paid for various closing costs, click here.)

The truly insidious lenders out there realize that they're catching their customers during one of the most vulnerable points of their lives — when they're about to buy their first home, a darling weekend lake house or the palace of their dreams. After coming along so far in the process, many buyers are itching to move in, and consequently overlook small, unexplained charges. Others might notice some fishy line items but decide not to fight them. They're reluctant to walk away from the deal over an extra, say, $500 of unexplained costs.

The government has tried to level the playing field for weary home buyers. Federal law requires lenders to provide borrowers with a good faith estimate (GFE) of settlement charges three days after they apply for a loan. Unfortunately, no law requires lenders to provide estimates of closing costs before a borrower applies. This makes it tough to compare fees from one bank with another. It's a bit like comparing the relative value of two four-bedroom houses in different parts of the country. It can be done, but it's not easy.

But this doesn't mean it's impossible to shop around for the lowest closing costs. "It's important to be a diligent borrower," Gumbinger says. "It's not enough (for a lender) to say that everything will be fine." Buyers need to go on the offensive, carefully reviewing fees and pitting lenders against each other if necessary. If a bank or mortgage brokerage really wants the business, it'll start cutting those fees quickly.

Here's some advice on how to get the lowest costs possible.

Shopping Around
Mortgage experts recommend borrowers contact as many as a dozen lenders while shopping for a loan. Most lenders will merely volunteer their menu of products and corresponding interest rates — but shoppers should also insist on an estimate for closing costs. While some might refuse outright, many will comply. In this competitive environment, more and more banks will give consumers at least a rough idea of how much they charge, even if the disclosure isn't as complete as an official GFE, says Jennifer Murphy, loan counseling director for New Jersey Citizen Action, a citizen watchdog coalition.

Once you have a handful of estimates, make sure the total cost for each mortgage isn't considerably higher than the norm. As a rule of thumb, total settlement costs, including taxes, range from 3% to 5% of the total price of the home, says HSH Associates' Gumbinger. Think about tossing any offers that come in significantly higher than this.

At the same time, it's unwise to focus on closing costs at the exclusion of the interest rate. Mortgages with lower interest rates typically carry higher closing costs in the form of points or other fees. In some instances — when a borrower knows he'll be in the home for many years, for example — it may make sense to consider lower-rate mortgages with higher costs, provided the fees are within reason and the borrower is getting a much lower interest rate in return. There's only one way to decide whether the higher upfront costs are worth the lower interest rate: Do the math. If you think you'll be staying in the home for just a few years, it's probably unwise to buck up at closing for one or two points, for example.

Typical Fees
Once you've identified the most promising estimates, it's time to play hardball by playing the lenders off each other and negotiating the best deal. Before you start, you need to know which fees are negotiable and which are not.

Fees that go to a third party are generally firm. These include the title search, appraisal, attorney's fees, credit report and title insurance. It wouldn't be completely out of the ordinary, however, for a less-than-reputable lender to overcharge you for one of these services. If one lender charges $150 for a credit report and all of the others charge only $50, you should ask why.

Fees for services not performed by third parties — like courier, express mail and other administrative chores — can also be reduced. "You name them, they are negotiable," say Neill Fendly, the legislative chair for the National Association of Mortgage Brokers.

Then there are the charges that the industry affectionately calls "garbage" or "junk" fees. These are the excessive processing and documentation fees charged by unscrupulous lenders, explains Fendly. Examples include settlement costs, underwriting fees and application fees, which might be little more than alternative names for the same service. Should you come across these, immediately question your lender, Fendly says.

Final Negotiations
Never forget that you can walk away from the mortgage at any time before closing — a detail that's certainly not lost on the lender or broker. So when you finally get your hands on a good-faith estimate, make sure the fees aren't much different from the initial ballpark figure. If you see more costs piled onto your loan, be prepared to take your business elsewhere if they aren't removed.

Assuming you're happy with your good-faith estimate and you choose to go forward with your loan, ask for a copy of your HUD-1 settlement statement at least one day before closing. This is your final tally of all of your costs and where the money will be distributed. Compare this document against your good-faith estimate to make sure no last-minute items were added. If you notice that your lender has taken some liberties but are reluctant to walk away from the deal for fear of losing your down payment, your last option is to file a complaint with the U.S. Department of Housing and Urban Development Office or sue your lender. (Click here for more information.)

Finally, some lenders will try to turn a dime by selling borrowers other products along with their mortgage. A common one is credit insurance, which protects homeowners against foreclosure should they lose their job and become unable to pay their mortgage on time. Our advice: Don't buy it. You might end up spending an extra $50 a month for a service that your lender would likely provide for free. "It is in the bank's best interest to keep people in their homes rather than go through a foreclosure," says Laura Armstrong, a spokeswoman with the Mortgage Bankers Association of America.

We know, all of this sounds like a heck of a lot of work. But it's certainly worth your while. Some diligence before you sign on the dotted line could save you hundreds of dollars — enough for the several cans of primer and topcoat necessary to cover the 70s-style wood paneling in your kids' new rumpus room.

Closing the Deal
Closing Costs Average Charge Description
Points 1 point equals 1% of the total loan amount. These are fees lenders demand upfront in exchange for a lower rate, with each point equaling 1% of the mortgage value. As a general rule, the more points a buyer pays up front, the lower the interest rate on the mortgage.
Application fee $274 Most lenders will charge an application fee.
Credit check $26 Only in rare circumstances will a lender waive the fee for a credit check.
Attorney's fee $350-$1,200 Fees could be even higher in urban areas. In some regions of the country, it's more common to hire a title agent.
Lender's attorney fee $399 If you make some noise, the lending officer may drop this fee.
Title search $217 A title search is done to make sure there aren't any unpaid mortgages or tax liens on the property.
Title insurance $360 Even if the title search comes up clean, a lender will often require insurance to guarantee that the title is clean.
Appraisal fee $315 Your lender will most likely want a statement of your property's value from an independent appraiser.
Inspections $85 Some lenders may require that your property is also surveyed, which could cost another $200.
Local fees (recording fees) $95 This fee will vary greatly by region.
Documentation preparation $204 Technically, this covers the preparation of the final legal papers, but it's really just a junk fee.
Source: HSH Associates