A Calculator For Estimating Junk Fees
October 25, 1999, Revised January 5, 2007
Lender junk fees consist of all upfront charges made by a lender except points. (See What Are Mortgage Junk Fees? ) They are almost always itemized, though borrowers should be concerned only with the total. Unfortunately, while rates and points are disclosed in the media, there is no place a consumer shopping for a loan can find information on total junk fees except directly from the lender, and that is often difficult.
Why is this? The Federal Reserve requires lenders to report the APR, which is a comprehensive measure of credit cost that takes account of the rate and most upfront credit charges. No doubt the Fed reasoned that since the borrower knew the APR, the figure for total credit charges that is used in calculating the APR was redundant. But it is not redundant, because many borrowers who would understand the figure for credit charges do not understand the APR, and are therefore reluctant to use it.
Furthermore, there is good reason for borrowers to be leery of the APR, even if they do understand it. The APR assumes the borrower will be in the house for the entire term of the loan, which most are not. Borrowers who don't expect to have their mortgage for 10 years or more can easily be led astray by the APR. In Does the APR Help?, I give some concrete illustrations of this.
If your time horizon is shorter than 10 years, it is more useful to know the credit charges used to calculate the APR than to know the APR itself. Using the calculator 10a ("Estimating Lender Fees From the APR on Fixed-rate Mortgages"), you can convert the one into the other. This calculator works backwards from the interest rate, points and APR on fixed-rate mortgages (FRMs) to derive the other upfront fees that were used by the lender to calculate the APR.
Here is an illustration of how it works. My local newspaper on September 20 quoted one lender as offering a 30-year FRM at 7.75% and 1 point, with an APR of 8.66%. Using a $100,000 loan amount, I entered these 4 items in the calculator, clicked on the "compute" button, and it told me that lender fees other than points amounted to $7180.
The fees derived from the calculator include only lender fees. Mortgage insurance premiums are included in the APR when a borrower has been identified who needs mortgage insurance, but the APRs disclosed to shopping borrowers do not have it. Other settlement costs, including third party charges, taxes and per diem interest are also not included.
The APR calculator assumes that lenders have properly identified all their own charges that should be included in the APR, and have calculated the APR correctly. There is a lot of anecdotal evidence to suggest that these assumptions are not always correct. Mistakes will usually be in the direction of understating the APR, which means that the junk fees calculated from the APR will, if anything, be understated.
Lender junk fees consist of all upfront charges made by a lender except points. (See What Are Mortgage Junk Fees? ) They are almost always itemized, though borrowers should be concerned only with the total. Unfortunately, while rates and points are disclosed in the media, there is no place a consumer shopping for a loan can find information on total junk fees except directly from the lender, and that is often difficult.
Why is this? The Federal Reserve requires lenders to report the APR, which is a comprehensive measure of credit cost that takes account of the rate and most upfront credit charges. No doubt the Fed reasoned that since the borrower knew the APR, the figure for total credit charges that is used in calculating the APR was redundant. But it is not redundant, because many borrowers who would understand the figure for credit charges do not understand the APR, and are therefore reluctant to use it.
Furthermore, there is good reason for borrowers to be leery of the APR, even if they do understand it. The APR assumes the borrower will be in the house for the entire term of the loan, which most are not. Borrowers who don't expect to have their mortgage for 10 years or more can easily be led astray by the APR. In Does the APR Help?, I give some concrete illustrations of this.
If your time horizon is shorter than 10 years, it is more useful to know the credit charges used to calculate the APR than to know the APR itself. Using the calculator 10a ("Estimating Lender Fees From the APR on Fixed-rate Mortgages"), you can convert the one into the other. This calculator works backwards from the interest rate, points and APR on fixed-rate mortgages (FRMs) to derive the other upfront fees that were used by the lender to calculate the APR.
Here is an illustration of how it works. My local newspaper on September 20 quoted one lender as offering a 30-year FRM at 7.75% and 1 point, with an APR of 8.66%. Using a $100,000 loan amount, I entered these 4 items in the calculator, clicked on the "compute" button, and it told me that lender fees other than points amounted to $7180.
The fees derived from the calculator include only lender fees. Mortgage insurance premiums are included in the APR when a borrower has been identified who needs mortgage insurance, but the APRs disclosed to shopping borrowers do not have it. Other settlement costs, including third party charges, taxes and per diem interest are also not included.
The APR calculator assumes that lenders have properly identified all their own charges that should be included in the APR, and have calculated the APR correctly. There is a lot of anecdotal evidence to suggest that these assumptions are not always correct. Mistakes will usually be in the direction of understating the APR, which means that the junk fees calculated from the APR will, if anything, be understated.