Is there really a new, unfair mortgage tax on those with high credit scores?
There has been a lot of talk the last couple weeks with headlines such as, “620 Fico scores get s 1.75% rate discount while 740 Fico scores pay 1% fee”.
Well that’s not exactly true. The changes have to do with Loan-Level Price Adjustments or LLPA’s. LLPA’s were introduced in 2008, after the last housing crises to measure and account for the risk associated to every mortgage. Fannie Mae and Freddie Mac(major private mortgage corporations that guaranty the vast majority of mortgages) place different risk assessments on borrowers based on their credit score, occupancy, number of units, etc. The riskier the loans, the higher LLPA’s associated with that loan. It’s kind of a like a risk penalization. If the loan is risky, you pay more to get the mortgage.
So the higher the LLPA, the higher the cost of the loan. To calculate the cost, ]the LLPA becomes a multiplier to the current interest rate. Even though everyone starts at the same current market rate, the LLPA adjust the rate to account for the cost/risk of the loan. A high risk loan raises the rate and the lower risk gets a lower rate.
So now, Fannie Mae and Freddie Mac have an obligation to the public “to promote affordable home ownership”. With this said, the increase of property values over the last few years, home ownership affordability has decreased greatly. In an attempt to make housing affordable to all buyers, the “agencies” decided to change the way they assess LLPA’s.
In the simplest of terms, they made risky loans more affordable by reducing the LLPA. Thus lowering the interest rate for lower credit score borrowers. Now they did raise the LLPA for some of the least risky loans at the same time. The overall goal was to decrease the overall difference between high and low credit score levels balancing the assessment, by penalizing low credit scores less.
Here is the new LLPA table against credit scores and loan to value(loan %).
You can see that <780 credit scores are clearly not paying a higher rate than those with lower credit scores. But it did cut the difference in about half.
Above you can see, using an 80% LTV value, with a score of 640 your LLPA 2.25% versus .875% for a 740 credit score. So you are still paying more with a lower credit score, but this difference of 1.375% is about half of what is was previously.
I have to say this is my second article I wrote today. The first one got trashed because I wrote it before I did enough research. So when you get upset about the news or things you see and hear. Do you own research or just ask your local lender like I did. I wanted to say it was ridiculous to give discounts to borrowers with ok-poor credit. There are no discounts! They are only penalized a little less than they would have been in the past. Always do your research.