For the most part, lenders’ application fees are reasonable. But some lenders have been getting creative with fees.  Some lenders will entice borrowers with a low application fee.  They later make up for this by charging “junk fees” that show up somewhere else as part of the closing costs.

Hidden Junk Fees

Closing costs are fees and charges tacked on to the mortgage over and beyond the interest rate being quoted.  They usually run between 6 and 8 percent of the mortgage amount being borrowed.  Closing costs include attorney fees, title insurance and points.  One point is equal to 1 percent of the mortgage amount borrowed and must be paid upfront at the closing.  Only with FHA loans can points be financed along with the rest of the mortgage.  A complete list of closing costs is detailed in Chapter 15 of the referenced (below) book.

Where Did Junk Fees Get Started?

Junk fees came about because of the cut-throat competition created  by the huge number of lenders competing for mortgage business around the country, Paul Havemann explained.  Consumers care mostly about the rates and points and, when shopping around, that’s what people compare, he said.  A low application fee might be quoted and what was once part of the fee thrown into closing cost fees.  (When business is slow, however, lenders seem to eliminate a number of these junk fees and closing costs to make their loans more attractive and competitive.  A number of states have also been cracking down on what fees are called and what can be charged upfront.)

A favorite fee of Havemann’s is the “document preparation fee.”  This fee can cost as much as several hundred dollars, he said, and is for nothing more than a secretary typing up the loan’s paperwork. 

Donald Henig, a past president of the National Association of Mortgage Brokers, has seen lenders charge $25 for a flood certification, where an independent agency checks to see if a property is in a flood zone.  The cost of the lender for this is roughly half that amount.

This Homebuyers Tip was excerpted from:

J. K. Lasser’s Guide to Buying Your First Home, by Joe Catalano, J. K. Lasser Institute, a division of Simon & Schuster, Inc., 1993

ISBN# 0671880667

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