Okay. So you’re thinking to yourself, “I called that lender because they advertised rates that were so low, but I didn’t get the rate.” Why not? The answer is relatively simple though some lenders don’t take the time to thoroughly explain it. Mortgage rates are low, but only if the borrower “qualifies” for that low rate. When lenders advertise rates, we are required to indicate “the fine print” that specifies who and how to qualify for the rate. The fine print also has to say how much the borrower must pay for that low rate – otherwise known as points. Unfortunately, many, if not most borrowers completely miss the fine print. Even worse, borrowers often get wind of low rates from a quick TV news spot. There is no requirement for CBS or CNN to share the fine print.
Borrowers often share mortgage stories with one another and undoubtedly somebody goes away thinking they got robbed. But unless you know all the details of the other person’s transaction, it’s possible the rate you got was what fit your situation.
Sometimes we hear complaints of bait and switch. Perhaps some people do get caught up in bait and switch, but more than likely, the borrower is a victim of a relatively new mortgage pricing demon called Loan Level Price Adjustments or LLPA.
The LLPA is a change in your loan costs based on the specific risk of your mortgage loan. LLPAs are standard across the board for Fannie Mae and Freddie Mac mortgages. It does not matter whether you go to Bank of America, Lucite Loan, or Mellow Fellow Mortgage.
After the shake-up in the mortgage business, Fannie Mae and Freddie Mac introduced loan-level pricing adjustments back in April 2008. If I were a betting woman, I would make a sizeable bet that less than 1% of borrowers know anythng about LLPAs. ABC and MSNBC are not going to mention it in the 10 seconds they might give to current mortgage rates.
Let me explain. It makes a lot of sense.
If you were to search for auto insurance, would you pay more if you had 5 accidents in the past three years and 2 DWIs? Yes. Or if you reside in a busy metropolitan area with no garage, would you pay more? Yes. If you wanted life insurance, do you think you would pay more if you have high blood pressure? Yes. Would a 25 year old person pay less for life insurance than a 55 year old person? Yes.
In the mortgage business, if you want to buy a home and your credit score is 640 and you need 85% financing, you will pay a higher rate than the borrower with a 740 score needing only 60% financing. And there are many other risk factors that can increase the rate or increase the upfront fees.
Here are just a few risk factors:
- Credit score is 720 or less
- A condo is being financed
- Financing a 2–family, 3-family, or 4-family property
- Buying an investment home
- Having less than 20% down
- Refinancing and taking out cash
- Having more than one mortgage loan on the home
Any one or combination of the above increases the chance of mortgage default. In which case, the borrower will pay a higher cost.
Why didn’t these extra costs exist prior to 2008? They did to a certain extent, but mostly in the subprime mortgage world. But even prime borrowers differ as to level of risk. Prior to 2008, most prime borrowers got the same interest rates. There were no LLPAs. But that means a lot of prime borrowers probably paid higher rates than they otherwise would have compared to today’s guidelines.
Keep in mind that the LLPAs are not discretionary. The fees are not sources of extra profit. Nor are they junk fees. LLPAs are mandatory costs. If your loan file triggers any LLPA, you must pay the fees. The additional fees can be paid either via a higher interest rate or higher closing costs.
If you find this to be the case in your situation, let me know. There may be other mortgage options that suit you better.
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