High closing costs could mean an effective interest rate that is .50% higher (or more) than the rate you think you are paying.

My home buyer's guide contains a complete description and reasonable cost range for 14 different closing costs that you are likely to see as a home buyer. I've included a few of the descriptions here:

Loan origination fee

Many lenders, especially mortgage brokers, charge an origination fee. This is the mortgage company's fee for securing financing for you.

The origination fee will vary from lender to lender and is (or should be) negotiable - but be reasonable. If you have had a rocky employment history that requires a lot of work to document - or have numerous late payments on your credit report, you should expect to compensate the lender for the additional work that is required to secure your loan approval.

However, if you are very creditworthy and provide all the necessary documentation at the time of the loan application (a list of everything you need to provide is included in my home buyer's guide), it is not unreasonable to ask the lender to accept a lower origination fee.

Loan origination fees are generally a % of the mortgage amount; usually between .5% and 2% - depending on the applicant and mortgage amount.  These fees go straight to the mortgage company.

Points

Points can be defined as simply the cost of obtaining a certain interest rate - think of points as paying interest in a lump sum upfront to lower your interest rate in the long run.

A point is 1% of the mortgage amount (not the sale price or appraised value). The more points you pay the lower the rate on your mortgage loan. Most lenders will also offer no point interest rate options.

Which is the best option? No points, 2 points, 3 points? My home buyer's guide includes a formula that you can use to calculate the overall benefit (or lack of one) of paying points.

Title insurance

Your lender will require title insurance. However, the lender's title policy insures the lender's interest in the collateral for the loan (your home) against loss due to title defects that were not discovered at the time of the sale - it offers no protection for the homeowner.

Make sure you get a an owner's policy (most title agencies will provide this automatically). An owner's title insurance policy protects your equity against titles defects up to the face amount of the title policy, not just to the amount of your mortgage.

Although the chances of someone challenging your interest are slim, if it does happen you could stand to lose one of your largest investments - your home. How could this happen? Isn't the title checked carefully before closing?

A title exam, which is basically an in depth investigation of the property including rightful owners, liens, easements, and restrictions is completed before closing but isn't foolproof. For example, one of the previous owners could have been married and potentially his or her spouse (who had an interest in the property based on the marriage) did not sign the deed when the property was transferred three owners back.

It may be difficult for the title examiner to detect this. The previous owner's spouse technically still has an interest in the property and could attempt to claim it from you at any time. The typical title insurance policy will provide for payment of this claim if it is legitimate.

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