Why You Won’t Always Get The Lowest Advertised Mortgage Rates
Mortgage Market Update
From the desk of Joe Bailey
Keeping You Informed…
Why You Won’t Always Get The Lowest Advertised Mortgage Rates
Mortgage rates are low but maybe not for you, specifically.
If you’ve ever wondered why loan officers can’t give you the best “advertised rate”, it’s not because of a bait-and-switch scheme or something worse. Most likely, you’re being quoted higher mortgage rates because of a government mandate called Loan-Level Pricing Adjustments.
LLPAs are changes in loan costs based on your personal risk traits.
Fannie Mae and Freddie Mac first introduced loan-level pricing adjustments in April 2008 and they’ve been a constant cause of consternation among conforming borrowers since.
The problem is loan-level pricing adjustments aren’t exactly Prime Time news and so the first time most people hear about them is at the point of application. LLPAs can raise a person’s mortgage rate by a full percentage point or more.
To understand what LLPAs are and how they work, let’s talk about auto insurance.
For all of us, there is some base insurance rate for which we all qualify. It’s based on our age, our credit and the ZIP code in which we park the car. From there, however, adjustments are made — drive a riskier car, pay a higher premium. Have a history of accidents, pay a higher premium. Things like that.
The same goes for mortgage loans, the more the risk, the higher the rate. A few of the risk factors that can change a person’s mortgage rate include:
- Living in a condo with less than 25% equity in the home
- Having a credit score of less than 740
- Living in a 2-unit, 3-unit or 4-unit home
- Using a home as an investment property
- Doing a “cash out” refinance with less than 40% equity in the home
- Having a second mortgage to subordinate
Each of these traits — historically — increases the likelihood of your default. Therefore, to hedge, Fannie Mae and Freddie Mac charge flat fees to offset potential future losses.
LLPAs are not discretionary fees; sources of profit or padding. Nor are they junk fees. LLPAs are mandatory costs triggered by specific loan characteristics. There’s no flexibility, either. If you trigger the guidelines, you pay the fees.
The Fannie Mae Loan-Level Pricing Adjustment chart is as thorough as it is punitive. At least borrowers get to choose how they pay them:
- LLPAs can be paid as a traditional “closing cost”, due at closing.
- LLPAs can be built into an interest rate. In general, interest rates increase 0.250% for each 1 percent of loan-level pricing adjustment.
It doesn’t take much to trigger the risk-based pricing of Fannie Mae and Freddie Mac; in fact, a lot of conforming mortgage applicants do trigger the LLPAs.
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