How to Estimate Junk Fees

September 21, 1998 "Junk fees" can be defined as all fees imposed by lenders as a condition for the granting of a loan which are defined in dollars, rather than as a percent of the loan. [See What Are Junk Fees?] Fees expressed as a percent of the loan include "points" which are shown along with the interest rate, and "origination fees" which may or may not be shown. Junk fees are seldom shown in advertisements, and sometimes it is difficult to get an accurate figure directly from the lender. It is possible to estimate junk fees, however, from the APR that lenders must show in advertisements whenever they show a rate and points. Since the APR takes account of most junk fees, it is possible to work backwards from the reported APR to determine the junk fees. For no good reason, lenders are not required to include application fees, or the cost of credit reports, appraisals, and document preparation in the junk fees used to calculate the APR. Hence, the estimates of junk fees will not include these items. To estimate junk fees charged by a particular lender, record the rate, points and APR reported by that lender on a 30-year fixed rate mortgage (FRM). Then use the table below to find the estimated total points and fees for different combinations of rate and APR. Go down the column underneath the interest rate that corresponds to the rate quoted by the lender until you get to the APR reported by that lender. Interpolate as needed to derive the estimate of total points and junk fees, then subtract the points on a $100,000 loan to derive the estimate of junk fees alone. For example, the quotation is 6.25% rate, 3 points, and 7.05% APR. The estimate of total points and fees is $7453 for an APR of 7% and $8380 for an APR of 7.10. For an APR of 7.05%, therefore, the estimate of total points and fees is half way between these figures, or $7917. From this, subtract 3 points or $3,000 to derive the estimate of junk fees alone of $4917. This includes any origination fee, but excludes the items cited above and also excludes any mortgage insurance premiums.   Total Points and Fees on a 30Year $100,000 FRM at Varying Interest Rates and APRs Interest Rate APR% 6.25% 6.375% 6.50% 6.625% 6.75% 6.875% 7.00% 7.125% 7.25% 6.30 $526                 6.40 1565 $262               6.50 2587 1297 $0             6.60 3592 2316 1032             6.70 4581 3318 2047 $770           6.80 5554 4303 3046 1782 $510         6.90 6511 5273 4029 2777 1519 $254       7.00 7453 6227 4995 3756 2511 1259       7.10 8380 7167 5947 4720 3487 2247 $1001     7.20 9292 8091 6883 5669 4448 3220 1987 $747   7.30 10189 9000 7804 6602 5393 4178 2956 1729 $495 7.40 11072 9895 8711 7520 6323 5120 3911 2695 1474 7.50 11942 10776 9603 8424 7239 6048 4850 3646 2437 7.60 12797 11643 10481 9314 8140 6960 5774 4583 3385 7.70 13639 12496 11346 10190 9027 7859 6684 5504 4318 7.80 14468 13336 12197 11052 9901 8743 7580 6411 5236 7.90 15284 14163 13035 11901 10760 9614 8462 7304 6140 8.00 16088 14977 13860 12736 11607 10471 9330 8183 7031 Since writing the above, I have developed a calculator that does not require any arithmetic on your part.  Click on Calculators and scroll down to "Estimating Lender Fees From the APR on Fixed-rate Mortgages." Copyright Jack Guttentag 2002

Jack Guttentag is Professor of Finance Emeritus at the Wharton School of the University of Pennsylvania. Visit the Mortgage Professor's web site for more answers to commonly asked questions.

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