Personalized Mortgage Rates

20 December 2024, 1:16pm

What Affects My Mortgage Rate?

Loan-Level Price Adjustments (LLPAs) are risk-based fees that directly influence the cost of a mortgage. These adjustments are applied based on various risk factors associated with the borrower and the loan itself. Here's how they impact mortgage rates:

1. Credit Score Impact: One of the most significant factors influencing mortgage rates is the borrower's credit score. Borrowers with lower credit scores are considered higher risk and therefore face higher LLPAs. This results in higher mortgage rates for those with poor credit compared to those with excellent credit.
2. Loan-to-Value (LTV) Ratio: The LTV ratio, which compares the loan amount to the appraised value of the property, also affects mortgage rates. A higher LTV ratio indicates a smaller down payment, which increases the lender's risk. Loans with higher LTV ratios incur higher LLPAs, leading to higher mortgage rates.
3. Loan Purpose and Property Type: The purpose of the loan (e.g., primary residence, second home, investment property) and the type of property (e.g., single-family home, condo, multi-unit property) also influence mortgage rates. Loans for investment properties or multi-unit homes typically have higher LLPAs due to the increased risk, resulting in higher mortgage rates.

Understanding LLPAs and their impact on mortgage rates can help borrowers take steps to improve their financial profiles, such as boosting their credit scores, reducing debt, and saving for a larger down payment. By doing so, they can potentially lower their LLPAs and secure more favorable mortgage rates.

What Do LLPAs Look Like?

Lenders price their loans from investor "ratesheets", which are grids of pricing that investors are offering. These grids update daily with the market, and sometimes update multiple times during the day. Note that the tables below are examples only and do not reflect current mortgage rates and may not reflect current LLPAs.

The "price" is the amount the investor will pay for $100 of loan amount. Let's say you have a $300k loan amount. At 5.875% the investor will pay ($300,000 x ($100.294 / $100)) = $300,882 for that $300k loan. You'd get a small lender credit of $882.

The interest rate closest to $100 is called the "par rate", which is the interest rate that investors get without any lender credits or points charged.

If you "buy down" the rate, then the investor wants money from you up front to compensate them for giving you an interest rate below par. This is called "points". In general you can't do more than 2 points for your loan to be considered a "qualified mortgage".

The 5.375% rate has a price of 97.979. To get the points you subtract this from 100, so (100 - 97.979) = 2.021 points. You probably wouldn't be offered this rate from your lender because it is more than 2 points.

5.50% is (100 - 98.556) = 1.444 points. On a $300k loan the investor will pay ($300,000 x ($98.556 / $100)) = $295,668 for the $300k loan. The ($300,000 - $295,668) = $4,332 is the points, which you have to bring to closing. ($4,332 / $300,000) = 1.444%.

Ratesheets are just the "base pricing". Most borrowers will have one or more of the LLPAs below which affects the pricing and their interest rate options.

FICO/LTV LLPAs

There is a adjustment grid based on credit score and loan-to-value (LTV). Loan-to-value is your loan amount divided by the property value. On a purchase "property value" is the lower of the purchase price or the appraised value.

There are separate grids for purchases, rate/term refis, and cash-out refis. The purchase and rate/term refi LLPAs only apply to loans with terms more than 15 years. The cash-out LLPAs apply to both 15 and 30 year loans.

Let's says you have a 753 credit score and your LTV is 80%. On the grid that comes out to -0.875. You add the LLPA to the base pricing. Let's say you are wanting 5.875% and the base pricing is 100.294 above. Add in the LLPA and now your pricing is (100.294 + (-0.875)) = 99.419. You would pay (100 - 99.419) = 0.581 points for 5.875%.

0.875% of a $300k loan is a pretty big number, $2,625.

You can get better pricing by moving where you land on the grid. Maybe you can pay down your credit cards and get your credit score up to 760. Then your LLPA is -0.625, which is 0.25% less. 0.25% of $300k is $750.

Or maybe you can do 25% down instead of 20% down. That moves you from -0.875 to -0.375, which is 0.50% less. You'd save $1,500 in loan costs by doing an extra 5% down ($15,000). ($1,500 / $15,000) = 10% return on your money. Plus your mortgage payment will be lower.

These LLPAs only apply to loans with a term more than 15 years. If you can afford the slightly higher monthly payments a 15 year purchase loan does not have FICO/LTV LLPAs.

Also, if you are a first time homebuyer or your gross income is less than 80% of the area media income (AMI), then you may qualify for a "LLPA waiver", which means none of the LLPAs would apply to you.

These LLPAs only apply to loans with a term more than 15 years. If you can afford the slightly higher monthly payments a 15 year purchase loan does not have FICO/LTV LLPAs.

If you have a low credit score then the LLPAs on a cash-out refi could mean there aren't any rates available.

If you're trying to do a cash-out refi and your LLPA is -5.125 then 6.25% would be (101.515 - 5.125) = 3.61 points. That would not be a "qualified mortgage" and your lender wouldn't have any options for you.

Additional Conventional Adjustments

There are also property type and occupancy type adjusters.

Condos have a big LLPA unless you do 25% down.

There's a large drop in the LLPAs for a 2-4 unit investment property if you do 25% down. At 20% down the LLPAs are (-3.375 + (-.625)) = 4.000. At 25% down they are (-2.125 + (-.375)) = 2.500. On a $600k fourplex you save $9,000 in closing costs if you do an extra 5% down (an extra $30k). That's a 30% return on your money.

"Subordinate financing" is for example a home equity line (HELOC). If you are doing a rate/term refi and you have an existing HELOC that you want to keep, that is going to increase your mortgage rate by 0.125% to 0.25%.

Conventional Loan Amount Adjustments

Investors are more interested in buying loans with lower loan amounts and certain states. Nearly 70% of all consumer debt in the US is California mortgages. California also has many consumer protections from foreclosure. This makes California mortgages the least attractive to investors. California is in "tier 1". Alaska is in tier 4 with most of the other states. Texas is in tier 6 due to its laws that allow easier foreclosure.

VA Loans

VA loans have fewer adjusters, basically just credit score and loan amount grids. The ratesheet for VA loans has better pricing than Conventional loans because VA loans are guaranteed by the federal government.