Settlement costs can be one of the least manageable features of home mortgages. I have
written about the pitfalls on numerous occasions, but not enough on how to avoid them.
It makes a difference whether the shopper is dealing with a lender or with a mortgage broker. I'll deal with the lender case first.
Settlement costs can be divided into the following categories: fees paid to lender;
lender-controlled fees paid to third parties; other fees paid to third parties; and other
settlement costs.
Fees paid to lender (henceforth "lender fees") should be the shopper's major focus. Lender fees consist of points and dollar fees.
Points are an upfront charge expressed as a percent of the loan amount. An origination fee is the same except it is not related to the interest rate as points are.
Dollar feesare those specified in dollars. Some of the common fees are for processing, tax service, flood certification, underwriting, wire transfer, document preparation, courier and lender inspection. But from a shopping perspective, what they are called doesn't matter, and whether they are justified doesn't matter. All that matters is their sum total.
Shoppers take account of points in selecting a lender because lenders always report points alongside the interest rate. Dollar fees and origination fees, however, are not reported in the media and generally are not volunteered by lenders. For this reason, shoppers often fail to consider them in selecting a lender.
Shoppers should ask for dollar fees and should expect the lender to guarantee them through to closing. In contrast to guaranteeing a rate and points, which exposes a lender to market risk, there is virtually no risk in guaranteeing dollar fees. The same is true of an origination fee.
Many retail lenders guarantee their dollar fees now. These include eLoan.com, Indymac.com, HomeLoanCenter.com, Mortgage.com, Mortgage.etrade.com and Countrywide.com. If they can do it, any lender can, and they will if shoppers demand it.
Lender-controlled fees are paid to third parties for services ordered by the lender. These
include the costs of appraisals, credit reports and (when needed) pest inspections. Lenders know the prices of these services and can easily guarantee them in addition to their own fees. Countrywide.com, mortgage.com and mortgage.etrade.com include appraisals and credit
reports in their guarantees.
Other fees paid to third parties are not controlled by--and may not be known by--the lender. The most important of these are title-related services and settlement services. If you are in an area in which it can pay to shop for them, you can do it after selecting the lender. Mortgage.com includes third-party fees in its guarantee except for charges of governments.
Other settlement costs are a miscellany of charges, which require little vigilance by the 
borrower:
Government charges, such as transaction taxes, are what they are.
Per Diem interest is interest for the period between the closing date and the first day of the following month. At worst, the lender might try to tack on an extra day or two.
Escrow reserve is your money placed on deposit with the lender so the lender can pay your taxes and insurance. The amount is based on a HUD formula.
Hazard insurance is your homeowner's policy, which you purchase from a carrier of your choice.
In sum, when shopping lenders you want the total of points including origination fee if any, dollar fees and lender-controlled fees paid to third parties. Ask if they will guarantee all fees except points in writing.
The common mistake that shoppers make is to select a lender without knowing any of the lender charges except points, then try to negotiate other charges afterwards. Typically they do this after they receive a Good Faith Estimate (GFE), which itemizes all the settlement costs including all lender charges.
But challenging individual cost items is not an effective way to control lender fees. The
typical borrower has little to no factual basis for challenging a cost item. Even if they have such knowledge, their bargaining power is weak. Having already selected the lender, few are prepared to walk from the deal and the lender knows this.
Furthermore, even if a determined borrower succeeds in bludgeoning the lender into making a change, the determined lender can get it back somewhere else. The costs shown on the GFE are "estimates" and can be different at closing than they were the day before closing. This is a game the borrower can't win.