Wednesday, April 16, 2008

Mortgage Rates are Low But Millions Won't Qualify

The topic is a little stale and monotonous. But if you have any interest in mortgage rates or your ability to get a great mortgage loan in this credit crunch keep reading. Otherwise return to your regularly scheduled net surfing. You keep hearing (and watching) me say that mortgage rates are down, but that not everyone is eligible for the lower rates. This chart should help clarify:

To read it, just find the intersection of your credit score and loan-to-value. The number in the box is the mandatory mortgage fee that mortgage financier Fannie Mae tacks on to your closing costs.
The fee is calculated as:
(Mandatory Fee) = (Loan Size) * (Mortgage Pricing Adjustment) / 100
These added costs are making conforming remortgages cost-prohibitive for a lot of Americans.
The risk-based fees are officially called "Loan-Level Pricing Adjustments" although the abbreviated form of "LLPA" is used just as often. I tend to call them "risk-based fees" because it's easier to understand.
The fees shown above, by the way, are in addition to the universal fee of 0.25 on all home loans, regardless of credit score or LTV. That particular charge is called the "Adverse Market Delivery Charge" and went into effect in December 2007.
But the costs don't stop there. There are other more risk-based price changes for homeowners to know about. For example:
All 2-unit properties carry 0.500 in mandatory fees
All 3-4 unit properties carry 1.000 in mandatory fees
"Cash out" remortgages at all LTVs can add up to 0.500 in fees
The good news is the mandatory mortgage fees don't have to be paid at closing. Most mortgage lenders will trade 1.000 in fees for a quarter-percent increase in mortgage rate. This means that if your mortgage rate is 6.000% and your costs are 1.000, you can accept a 6.250% rate and skip the loan-level pricing adjustment in its entirety.
Wrapping the fees into the mortgage rate makes the monthly mortgage payment higher, but preserves a homeowner's liquidity and cash position.
Expect more risk-based fees throughout this year, especially for LTVs above 80 percent, and for specific property-types such as condos and multi-families. If you watch this show, you'll see the bigger picture and how we got to this place.
The piling-on of risk-based fees makes now a good time to consider buying or remortgaging a home. Changes to pricing are made without advance notice and we all get taken by surprise. Always to our detriment.
Mortgage rates may fall with the economy this year, but it won't matter if the cost of financing keeps increasing. If you're going to want a new conforming or jumbo loan later this year, talk to a mortgage banker today and get a plan started.