Why You Can't Get An Advertised Low Mortgage Rate
If you've ever wondered why a loan officer can't give you an "advertised rate", it's not necessarily because of an intricate bait-and-switch scheme. Most likely, you're being offered a higher mortgage rate because of something called Loan-Level Pricing Adjustments.
Riskier loan characteristics increase the risk of a default claim. Fannie Mae and Freddie Mac created the LLPAs to help offset that risk. A few of the risk-based characteristics that can change a person's mortgage rate
include:
Condo loans with less than 25% equity in the home
Credit scores less than 740
Living in a 2-unit, 3-unit or 4-unit home
Using the home as an investment property
Doing a "cash out" refinance with less than 40% equity in the home
Having a second mortgage to subordinate
The most important thing to remember about LLPAs, though, is that they're not discretionary lender fees; sources of profit or padding by the loan officer or the bank. They are specific fees assigned to specific loan characteristics.
Fannie and Freddie insure against losses in the country's conforming mortgage portfolio and Loan-Level Pricing
Adjustments are the fees they charge to insure against extra risk.
The Fannie Mae Loan-Level Pricing Adjustment chart is as thorough as it is punitive.
As a borrower, you can choose to pay your LLPAs as a one-time, at-closing fee. For most people, this is the more economical solution but it does requires an up-front cash payment and not everyone is comfortable doing that. The more common alternative is for people to build the LLPA into their interest rate.
In general, each quarter-percent LLPA loan fee can be offset via an increase of 0.125% on the offered interest rate. In the near-term, this is often the cheapest option but, over the life of the loan, an extra 0.125% can really add up.
It's especially true for real estate investors whose LLPA factors can range as high as 3.000 percent. Higher interest rates eat up the cash flow it takes to make a rental property work -- paying the fees at closing is often the best course.
It doesn't take much to trigger the risk-based pricing matrices of Fannie Mae and Freddie Mac; a lot of conforming mortgage applicants do. If you've read the Fannie Mae LLPA chart and don't know what to make of it, send me an email and I can help you figure it out. The math is simple once you know what you're looking for.
