On reconsidering this topic recently, I found I didn’t like some of what I had written about it earlier. Indeed, I don’t much like the term “junk fees” anymore. It is part of the language, however, and we are stuck with it. I entered it in Google just before I wrote this, and 1.5 million entries came up, with this article number one. Hence, I have kept the title intact but brought the content up to date. 

Definition of Junk Fees

Mortgage junk fees are itemized upfront lender charges, which, if borrower convenience was the major objective, would be consolidated into a single charge.

Not all upfront lender charges are junk fees. Points, which are upfront charges expressed as a percent of the loan, are part of the cost of credit along with the interest rate. For this reason, and because they are deductible, they should not be consolidated with other lender charges.

Interim or per diem interest, which is interest from the closing date to the first day of the following month, should not be consolidated either.  Since the charge depends on when during the month the loan is closed, it should always be reported separately. 

Escrows are payments to fund an account from which the lenders will pay the borrower’s taxes and insurance, rather than a lender charge. They should also be reported separately.

The remaining lender charges are junk fees. They include all lender charges expressed in dollars, such as the following:

Junk fees also include one charge expressed as a percent of the loan, called an “origination fee”.

Don’t confuse lender charges with third party charges. The early version of this article mistakenly included “appraisal fee" and "credit report fee”, which borrowers pay to third parties.

Junk Fees and Borrower Confusion

I don’t like the term “junk fees” and wish it had never been coined. The reason is that borrowers tend to interpret it to mean that no real service is being performed by the lender, and/or that a particular fee is too large. This mindset causes borrowers to look for information about how large a particular fee ought to be, and to bargain with the lender to get one or more fees reduced.

This is almost always a waste of time. If a lender is using excessive fees to pad his bottom line, and some do, a home purchaser typically will not learn about it until he is so far along in the process that his bargaining power is nil. On refinances, borrowers have bargaining power right to the end if they are prepared to walk away from the deal, but few are.

Many readers have suggested that I provide benchmarks as to what they might expect to pay for different lender services. I wince when I receive these, because such benchmarks would encourage the tendency of borrowers to examine the reasonableness of individual charges, which is not what mortgage shoppers should be doing. They should be comparing the rate, points, and total junk fees of different loan providers. On ARMs, of course, they should also be viewing other price features (See Information to Evaluate an Adjustable Rate Mortgage).

 In my view, fixed-dollar fees and origination fees are “junk” for reasons other than being over-priced, though many are overpriced.

What Makes Them “Junk”

Essentially what makes fees junk is that information about them is difficult for borrowers to obtain, it is confusing when they do get it, and lenders give themselves the option of changing the numbers right up to closing.

Junk Fees Are Kept Under Wraps: A major problem is that information about junk fees is extremely difficult to obtain early enough to be useful in shopping. In this respect, junk fees are very different from points, the other type of lender charge.

Points are an upfront lender charge expressed as a percent of the loan amount. Because points are viewed as part of the cost of credit, they are displayed wherever the interest rate is displayed. When you are quoted a price on a mortgage, or see a quote in the media, it invariably includes interest rate and points. Very seldom does it include junk fees.

The Purpose of Origination Fees Is to Confuse:  Perhaps the worst of the junk fees are origination fees, which are expressed as a percent of the loan, just like points; they are points in disguise. Their entire purpose is to allow the lender to appear to be charging fewer points than is in fact the case.

The Purpose of Itemization Is to Confuse: Junk fees are itemized fees. Lenders are not required to itemize their charges and a few (including Eloan, Amerisave and National Mortgage Alliance) don’t. These lenders charge one fee. Most of the remainder of the industry itemize because they believe that they can extract more in total from the borrower that way.

Lenders who itemize reduce their vulnerability to comparison shopping. Itemization shifts the consumer’s attention away from total fees, which is the only number that matters in shopping alternative lenders, and induces borrowers to focus their attention on the validity of individual charges.

Junk Fees Are Never Locked: When lenders “lock the rate,” they commit to a specified rate and points known to the borrower. Except for a few lenders, they do not commit to a specified amount of total junk fees. The Good Faith Estimate (GFE) that lenders are obliged to provide borrowers shortly after receiving a loan application, shows all fees but doesn’t bind lenders. They can revise the GFE right up to closing.

Bottom Line

Junk fees are good to know about so you can ignore them. In addition to the rate and points, your focus should be the total of other lender fees, exclusive of escrows and per diem interest. When you are shopping, ask the lender for that total in writing, and if the lender will lock it at the time he locks the rate and points. Most will if you demand it when you are in shopping mode.

Copyright Jack Guttentag 2007