There's no doubt about that this is a period of historically low mortgage interest rates. When Freddie Mac published its weekly mortgage rate survey last Thursday, we saw that the "average" 30-Year fixed mortgage rate is now at 4.96% - the lowest since the survey started in 1971.
However, the cost of getting these low rates is increasing. While mortgage rates are falling, the number of points required to lock in those rates is rising.
When homeowners started defaulting on their mortgages beginning in late 2007, Fannie Mae (FNMA) created a loss-offsetting fee-generating scheme called "loan-level pricing adjustments" (LLPAs). The concept was basic: For mortgage applicants with higher risk profiles, there will be additional up-front payments to offset potential long-term losses.
This is similar to the auto insurance model where younger drivers pay higher premiums. Basically, the riskier the applicant, the higher the fee. At the beginning of the program, FNMA defined "risk" as a combination of borrower credit score and home equity percentage. In general, those who have lower FICO scores and higher loan-to-values paid more in costs than those who have higher credit scores and who had more equity in the home.
Thanks to FNMA's new LLPAs, lenders are now requiring an average of 0.7 point for you to get that 4.96% rate. (1 "point" is a fee equal to 1 percent of the loan size. For a $200,000 mortgage, 1 point will be $2000.) Therefore, to get a 4.96% interest rate on a $200,000 home loan, today's lender will require an extra $1400 in closing costs - that's an additional $1,400 over and above the "typical" closing costs normally associated with a purchase of a home or refinance of a mortgage.
The new fees do not apply to 15-year fixed rate mortgages or "My Community Mortgages" They also do not apply to most government loans. They do apply to virtually all other mortgages. In addition, FNMA's definition of risk has expanded. The following is a sample of what the LLPA means to you:
- For a 2-unit property - up to 1.0% in additional fees;
- For a condo/co-op with less than 25% equity - up to 0.75% in additional fees;
- For an interest only mortgage - up to 1.0% in additional fees;
- For a 1st mortgage with a subordinated 2nd mortgage or home equity line of credit - up to 0.50% in additional fees; and
- For a "cash out" refinance - up to 3.0% in additional fees.
But it doesn't stop there. FNMA has also adjusted its original FICO-LTV matrix. Nearly everyone with a mid-FICO credit score of less than 720 will also face higher closing costs on their home loans.
With the new LLPAs, any number of traits in your mortgage could increase your closing costs, such as:
- Your credit score;
- Your downpayment / equity percentage;
- Your home's property type (owner-occupied primary home, 2nd or vacation home, or investment (rental) property);
- Your reason for wanting a mortgage (purchase, rate/term refinance, cash-out refinance); and
- Your loan type.
To make matters worse, virtually all LLPAs are cumulative. For more information about the new LLPA fees, visit FNMA's web site at http://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0838.pdf.
Mortgage rates and loan fees often move in opposite directions. To get lower rates, you would pay more in points. But, if you wanted to pay less in fees, then you must accept a higher interest rate. It's a trade-off.
This is FNMA's 5th risk-based pricing update in the last 15 months. And it probably won't be the last adjustment either. Therefore, if you're torn between buying a home now or later, consider that the cost of waiting may outweigh the benefits of falling prices or falling rates.
As always, you can call me toll-free at (866) 684-1233 ext. 3913 to answer any questions you have about mortgage programs and interest rates, and to discuss your best loan options.
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Thank you, Lewis! Definitely a time for those who are sitting on the fence about their refinance to make it happen!