|What qualifies as a high-priced loan these days?
High priced loans by industry-standards are any first mortgage loan that exceeds 1.5 percent in APR (annual percentage rate), the weekly rate for a fixed rate or adjustable rate loan backed offered by Fannie Mae or Freddie Mac.
Comparing mortgages? One lender’s fees and lower rates might trigger a higher-priced loan even if it seems like a better offer.
APR is a disclosure of costs all lenders are required to provide on all forms of advertising. The annual percentage rate takes into consideration your closing costs, adds them to the balance of the loan and re-amortizes the numbers over the term of the loan to compute your APR. The higher your APR, the higher priced your new mortgage loan becomes.
According to the Consumer Financial Protection Bureau’s ruling that went into effect Jan. 10, “a high-cost loan is a first mortgage with an APR of more than 6.5 percentage points higher than the average prime offer rate, which is an estimate of the rate people with very good credit typically pay for a similar first mortgage.” In most circumstances, a loan of this nature is considered to be hard money often dubbed private money financing. Higher-priced loans are considered to be 1.5 percent or more in annual percentage rate above the weekly offered prime rate by Fannie Mae or Freddie Mac.
Comparing rates, closing fees
• 1. Compare lenders by getting quotes in writing.
• 2. Take the prime offered interest-rate corresponding to the most current week at www.ffiec.gov/ratespread/aportables.htm.
• 3. Add 1.5 percent to this week’s offered rate.
• 4. If your APR associated with your mortgage offer is 1.5 percent higher, you have a higher priced loan.
• Consumer tip: When purchasing an interest rate, upfront overhead is usually required by the lender in the form of discount points, which affect the APR. Discount points can be any dollar amount tied to a specific interest rate given.
For example, a first mortgage in the amount of $350,000 at 4.375 percent might be offered by a lender with a discount fee in the amount of $1,500, which translates to half percent in terms of a discount point.
The same lender might offer the same 30-year fixed rate without the $1,500 fee in exchange for an interest rate at 4.5 percent. In this particular example for every .125 percent drop in rate price increases by $1,500.
For every increase in rate by .125 – $1,500 goes towards paying closing costs associated with the transaction as lenders are required to pass savings on to the consumer in the form of a lender credit.
This also is how a no-fees mortgage works.
• Mortgage tip: Bond prices change daily with the ebb and flow of money between stocks and bonds based on economic events.
Fees that can make your loan price higher include discount points, loan origination, mortgage broker or lender, tax/flood service, mortgage insurance premium, title insurance, recording and escrow. Fees such as property taxes and insurance are considered normal carrying costs associated with owning a home and thus do not have any effect on a higher or lower priced loan.
Loan structure changes costs
During the loan process, there is an array of factors that could cause a change resulting in a higher APR. The two most common instances include a lower-than-expected appraisal, which could increase the loan-to-value. A reduction or a lower credit score could also increase the APR.
Fear not…a higher-priced loan can be fixed and the following shows how.
• Reduce the purchase price.
• Reduce the loan amount.
• Obtain a seller credit in a purchase transaction.
• Reduce the discount point, which usually means increasing the interest rate, thereby reducing the total loan fees.
• Reduce the interest rate with investor renegotiation (lender offers you a better interest rate if market has improved since locking rate in).
• Lengthen the term of the loan (applicable if initially looking for a shorter term mortgage such as a 15-year or a 20-year for example).
• Mortgage tip: Lower loan amounts, i.e. loan sizes $125,000 and below, can create a high-priced loan. Lenders have a certain margin per loan they must account for, and if their margin does not allow for reducing fees, for example, lower loan amounts can be more challenging to obtain than bigger loan sizes. The key is to work with a lender who is competitively priced on all loans.
Consumers seeking mortgages should be wary of higher-priced loans when comparing rates and fees. It becomes especially important in the shopping phase because lenders quote rates and fees aggressively in an attempt to earn your business. The Consumer Financial Protection Bureau wants to continue to make it a level playing field by keeping lenders accountable and consumers informed.
Scott Sheldon is a local mortgage lender, with over six years of experience helping people purchase and refinance primary residences, second homes and investment properties. Visit him at www.sonomacountymortgages.com.