Guest blogger Michael Dunsky from Guaranteed Rate is back again to take a look at the recent announcement by Fannie Mae that a borrowers costs and/or interest rate will be rising in the near future.
Michael comes to the Massachusetts Real Estate blog on occasion because of his extensive knowledge on what is going on in the world of finance and mortgages.
More Bad News For Borrowers With Fannie Mae Backed Loans
Fannie Mae’s recent announcement indicates that on April 1, 2011 they are implementing a higher interest rate to borrowers even if they have a perfect credit score. This change is being implemented for any loan term over 15 years. Freddie Mac will also make fee structure changes as of March 1st.
They call this a Loan Level Price Adjustment (LLPA) and this means that borrowers are going to be charged more in the form of cost or higher interest rate based on a combination of how much down payment or the amount of equity in their home if they are refinancing, as well as their credit score.
Basically, the LLPA is Risk vs. Reward for the banks. This is nothing new as Fannie Mae and banks have been doing this for years and continue to reevaluate every so often. The higher the risk of the loan, the higher the cost will be. This is not all that unreasonable. They should charge more for riskier loans! It makes sense that the less qualified a borrower is, the higher the cost of their loan should be.
What doesn’t make sense is that these new changes NOW impact borrowers even with perfect credit!
Here are some of the highlights or low lights as some refer to them:
- Someone buying a home with credit OVER 740 with 25% or lower down payment will now pay approx .125% more in rate.
- A borrower with a credit score over 740 refinancing to 80% of the value of their home and taking out additional cash can expect to pay an additional .25% higher in rate.
- Anyone buying or refinancing a condominium (excluding detached condos) with less than 25% down payment (or equity) can expect an increase in rate of almost .5%!
Since the announcement from Fannie Mae most investors have already, or are about to implement the new pricing. Borrowers without larger down payments will see slightly higher rates. For those with lower credit scores, they can expect much higher rates.
This move by Fannie Mae is just a means of trying to become more profitable after the mortgage meltdown. The government a.k.a us taxpayers have spent billions trying to keep Fannie Mae and Freddie Mac afloat. With 2011 expected to be another big year in foreclosures, the losses are expected to continue to mount. Passing the mortgage costs on to borrowers should partially stem the tide.
Now, here’s the good news. There are other financing options that may not be as costly as the new LLPA brings. One solution for a borrower with less than 20% down is to take a closer look at FHA financing. FHA may in fact, be less costly given the LLPA changes. See a comparison of some of the differences between a conventional loan vs an FHA loan.
Don’t forget that if you are purchasing a property that needs some improvements the 203k rehabilitation loan is a terrific option! The 203k rehab loan is a simple program that opens the doors for the average home buyer to receive money to fix up a home the way they would like it. Maybe you are looking at a short sale or foreclosure home or any property for that matter that needs a little bit of TLC.
Another solution to a borrower with greater than 20% down would be to look at a second mortgage to reduce the loan to value and thus, higher interest rate.
The LLPA changes are certainly not favored by anyone but loan officers hands are not completely bound. There are financing options that may be available to help offset the cost increases forthcoming.
Home buyers shopping for mortgages should be aware of these fee increases and take them as a reminder of how important it is to maintain the best credit score possible. For some borrowers looking for a loan it might make sense to put off obtaining a mortgage until they have improved their credit score. See how to improve a credit score to make that a reality.
Take the time to find a licensed, reputable, experienced loan officer. He or she will certainly have the knowledge and ability to structure the best financing option for their clients given the ever-changing mortgage climate that we are in. Besides a lower interest rate a good mortgage broker can show you some of the better reasons to refinance a mortgage.
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About the author: The above Real Estate information on Fannie Mae Mortgage Interest Rates and cost rising was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service the following towns in Metrowest MA: Hopkinton, Milford, Southboro, Westboro, Ashland, Holliston, Medway, Franklin, Framingham, Grafton, Hopedale, Mendon, Upton, Northbridge, Shrewsbury, Northboro, Bellingham, Uxbridge, Worcester and Douglas.
Bill,
I think that Michael may have meant to say “in points” not “in rate”.
Yes, the GSEs are increasing the cost of credit, and even for those that previously were considered to have good credit and a sufficient down payment. The LLPA matrix is an adjustment to the price, not the rate per se. In the case of a client with a 740 middle score and putting down less than 25% (i.e. a 75.01% LTV), they’ll pay an additional .25 point.
In today’s market a .50% difference in rate costs approximately 2.75 points. So 1/4 point equals a difference in interest rate of approximately .05 % … still higher, nonetheless.
For anyone wanting to see a copy of the new LLPA (… you’ll soon have a better appreciation for the craziness your lender has to put up with ), which includes both the current and effective April 1, 2011 version, visit: http://budurl.com/FannieMaeNewLLPA.
Bill, I really like your blog. I’m impressed with how you’re always adding great content for your readers.
Paul
I heard somewhere else that we’re going to be seeing super high interest rates soon.
Well, let me get this straight. We the taxpayers who saved Freddie and Fannie’s “A” will now have to pay more interest because who got stupid? These fools hurt so many older Americans like myself and now we must be saddled with more of their stupidity, when will it stop? I ain’t no finance guy but I sure don’t use my credit card to cover my “A” the way these dudes do, and then ask someone else to pickup the tab.