Comparing Apples to Apples
By James B. Nutter Jr.
President, James B. Nutter and Company

The biggest misconception among home buyers and refinancers is that you get the best deal by comparing interest rates.

That's like saying a fruit stand has great prices because all the fruit is 10 cents each. You can have all the cherries you want at that price; I'll take the watermelons.

A home mortgage will likely be the largest purchase you will ever make. And yet in one sense, it's just like any other purchase you make in any marketplace: The only way to determine whether you're getting the best deal is to compare apples to apples.

Two mortgage loans from two different companies can look the same on the surface: the same interest rate, the same 30-year term. Yet one will cost you thousands of dollars more than the other. The difference: junk fees. At James B. Nutter & Company we have never charged these fees while many of our competitors including some of the largest lenders in the country do.

What are "junk fees"? They are the specialty of some of the "bad apples" in the mortgage lending profession - fees attached to the closing costs of a mortgage loan that have no real-world justification. They don't defray any actual cost to the lender. They're just pure profit.

That's why junk fee levels vary so much - hundreds of dollars at some lenders, thousands at others. There's no objective standard on which to base such fees, so lenders set them at whatever level they think they can get away with.

Now, there are a handful of legitimate fees that lenders need to charge, because they pay for work done by independent contractors not employed by the lender. These include title policy and appraisal fees.

But "junk fees" are those that purport to pay for the lender's everyday costs of doing business, or are just made up out of whole cloth. Many consumers think all such closing costs are standard, set amounts. They are not.

One of the more common "junk fees" is the "document preparation fee." Think about it: Did you pay a "document preparation fee" when you took out a life insurance policy? How about for your quarterly 401(k) statement? Do restaurants charge a "document preparation fee" for the menu? Why should a mortgage lender get away with it?

A "junk fee" could be any of several fees appearing on a closing cost good faith estimate: "underwriting fee," "processing fee," "table funding fees," or "waive escrow fees," among many others.

But the key to identifying a "junk fee" lender isn't terminology; it's the bottom line. Every lender has settlement costs, and every lender is required to give a borrower a good faith estimate of these costs after receiving a loan application. If they are excessively high, they are "junk."

The very best way to for consumers to identify junk fees is to compare. If Lender A charges $5,000 in settlement costs and Lender B charges $2,000, then Lender A probably has $3,000 in junk fees.

Homeowners can protect themselves from this abusive policy by simply getting competitive bids from different lenders.

There are three cost factors involved in a mortgage: rate, terms and closing costs. Add them up. If Company A and Company B have the same rate and the same terms, but Company A charges $700 more in closing costs than Company B, then Company B is the best deal. It's as simple as that.

If Lender A has a lower rate and higher fees, and Lender B has a higher rate but lower fees, then the borrower needs to do the math to figure out which is the best deal. Alternatively, the consumer can pick a constant, such as the same interest rate from each lender, and then compare terms and settlement costs to see who is charging too much.

The key is for the consumer to compare the offerings of several mortgage bankers. We don't charge high settlement costs, and we'll certainly meet anyone's rate offering. That's true of other good lenders, too. The borrower should compare the rate, the terms and the settlement costs. Too many buyers ask only about the first two, thinking closing costs are the same.

The U.S. Department of Housing and Urban Development (HUD) is against junk fees - and so are we at James B. Nutter and Co. But in the last few years, junk fees have become a major source of extra income for some mortgage lenders.

Not under our roof, though. We've built our business on fairness. Such excessive fees simply aren't necessary, and they certainly aren't in the best interest of the consumer. Come on home to James B. Nutter and Co. and avoid "junk fees."