The FHFA has responded to criticism about their new fee structure. How does the fee structure for a conventional mortgage work and how does these changes impact a homebuyer’s interest rate?
LLPAs – also called Loan Level Price Adjustments
LLPAs have been in the news a lot lately. What are they and how do they work?
When you apply for a mortgage, there are several criteria the lender looks at to evaluate your credit worthiness. Different issues will increase your risk. Those risk factors (also called LLPAs) set out by Fannie Mae and Freddie Mac – the two biggest institutional mortgage agencies – are:
- Credit Score
- Down Payment
- Living in the House or Rental Property, or even a Second Home
- The Purpose of the Loan – Purchase a Home, refinance the Mortgage or take Money Out of the Equity
- The Type of Home – Stand alone home, Condo, townhome, or Manufactured Home
- Fixed or Variable Interest Rate
- Property a Single Unit, a Duplex, a Tri-Plex, or a 4-Plex
- Term of the Mortgage – 30 year, 20 year or 15 Year
All these factors will impact the interest rate on a regular conventional mortgage. How?
Since these issue are predetermined by Fannie Mae / Freddie Mac, the lender identifies all the appropriate risk factors before you close on the loan. The lender then knows what fees Fannie Mae or Freddie Mac is going to charge the lender -- and ultimately the borrower - for that loan. If there is 1.50% in loan fees (LLPAs) for example that need to be paid (in addition to the regular closing fees), the lender makes adjustments to the loan interest rate or fees to offset those LLPAs.
Those LLPAs fees are paid within a couple of weeks after you close on your mortgage. On a $400,000 mortgage, 1.50% is $6,000 in LLPA fees. The lender has to pay that money upfront. In turn, the mortgage lender will go back to the borrower and charge higher fees, or a higher interest rate.
If the lowest interest rate available at a particular moment is 5.00%, the lender will raise the interest rate to offset that 1.50% fees from Fannie Mae or Freddie Mac. The lender may raise the interest rate to 5.75%. The payment jumps $187 a month. The lender will recoup $187 a month to repay the $6,00 back.
This leads to another question. Once the $6,000 is paid, does the lender automatically lower the interest rate? No. The lender will continue to take that higher payment until the loan is paid off.
That is how LLPAs work.