If you are closing on a home and you have spent hours comparing interest rates and mortgage schedules, weeks agonizing over the home sales figures for your target neighborhoods, and months calculating possible down payment figures based on your pre-approval amount, then you really have done your homework. However, if you neglected to consider closing costs -- and how to pay for them -- then there is still an important component to factor in before you make an offer on a house.

Closing cost basics
While you may only deal with a few people in the process of buying a home, there are many others working behind the scenes. Lawyers, home inspectors, and various agents all play a role in helping the deal go through, and all of them must be paid for their contributions to the process. The price tag of the home only covers what the bank expects to be paid. Everyone else is still waiting for their paycheck, and if you are the buyer, that means they are waiting on you.

If you hope to negotiate on closing costs, it is important to know who is getting what. Some of the most common closing fees are:

• Loan fees: The mortgage lender charges a variety of fees for the preparation process that leads to a successful mortgage. Loan origination fees, appraisal and inspection fees, credit report fees, and insurance application fees may all be passed on to the buyer.

• Advanced payments: In addition to fees paid directly to them, most lenders require the buyer to pay in advance for such items as the first month's interest on the mortgage, the first year of mortgage insurance, and the first month or year of any property insurance the buyer has agreed to.

• Title and paperwork fees: Title search and insurance, notary and document preparation, and attorneys' fees will all be settled in the closing process, along with any outstanding home inspection fees. These payments go out to the variety of people working to make sure no legal problems get in the way of the sale going through.

A fairly reliable rule of thumb is that closing costs will total anywhere from 2-5% of the price of the home. For those with credit problems, the total could be as high as 8%, but the mortgage lender will usually offer a "good faith estimate" of those costs to help the buyer prepare.

So what's the problem?
If closing costs are such a standard part of buying a house, why is any extra preparation necessary?

When someone is approved for a mortgage, the amount of approval is meant to represent the absolute limit they are allowed to spend. For years, however, that amount has become more of a starting point, or at best a target price. Since real estate is considered such a reliable investment, consumers struggle to figure out how they can purchase "the most home for the money." This often means buying more house than they can really afford.

Once the buyer's offer is accepted, any unexpected costs have to be absorbed somehow. In order to get extra money to cover closing costs, buyers will often lower their down payment or, if possible, raise the amount of the loan. Either way, the result is usually the same - higher interest rates and more mortgage payments.

Time honored strategies such as "we'll deal with that later" and "I don't know, we'll figure something out when the time comes" have led many home buyers into serious financial problems. It is easy to write off a couple of extra percentage points or another year of mortgage payments if that is all that stands between you and your new home, especially if the bank assures you they are being very generous in allowing you that option.

Buyers may unintentionally sign away thousands of dollars in such situations. The hard work that went into negotiating a low offer on a home can be undone with one mortgage adjustment for a lower down payment. Smart buyers plan for closing costs just as they would the down payment itself. Considering all costs from the very beginning of the buying process is the best way of insuring that months of careful planning won't be sacrificed at the last second.

Do I really have to pay for all that?
Actually, many closing costs are negotiable. The seller of the home may agree to share some costs, especially if the house has been on the market for a while.

Although it is true that many people contribute time and effort to preparing the mortgage, many of them probably work full time for the bank. The lender may waive many of the paperwork fees if it will help the deal go through successfully, possibly saving the buyer hundreds of dollars.

Endgame strategies for the tough negotiator
It is common for the actual closing costs to exceed the good faith estimate. Because the buyer is at a disadvantage - stressed out, trying to keep track of all the loose ends created by buying a house - lenders assume the buyer will be too busy to notice the difference, or too afraid of ruining the sale to argue. It is important to monitor such costs and be prepared to fight to get them back down. If necessary, the buyer can make the lender go line by line through the costs and justify each increase over the estimate. Usually the lender will back down, as long as the buyer has good enough credit to make the threat of finding another mortgage a valid one.

Closing costs are a necessity of buying a home, but there is no reason for anyone to get ripped off in the process. As long as the buyer can afford the home they are purchasing, there is plenty of time to track such costs and plenty of room to negotiate a deal that satisfies the buyer, the seller, and the mortgage provider.