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 rate because of a government mandate called Loan-Level Pricing Adjustments (LLPAs). LLPAs are changes in loan costs based on your personal risk traits. Fannie Mae and Freddie Mac first introduced LLPAs in April 2008 and they've been a constant cause of consternation among conforming borrowers since.

The problem is LLPAs aren't exactly Prime Time news and so the first time 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.

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 includes:

• Living in a condo with less than 25% equity in the home
• Having a credit score 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 Mac 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:

1. LLPAs can be paid as a traditional "closing cost", due at closing
2. LLPAs can be built into the interest rate. In general, interest rates increase 0.250% for each 1 percent of the loan-level pricing adjustment.

It doesn't take much to trigger the risk-based pricing of Fannie Mae and Freddie Mac; a lot of conforming mortgage applicants do it.

If you've triggered the LLPA chart and want to know your options, call or send me an email. Depending on your loan traits, there my be non-government programs that can give the same great rates as Fannie and Freddie, but without the risk fees.

Be sure to ask me about it. I answer all my own emails and would be happy to help you however I can.

John Payne is an active Mortgage Planner. Reach John via email at John@JPMortgageLoans.com or call 510-799-1400 or toll free 800-259-3424.