Page 10 - June 2023 Issue.indd

DOLLARS AND SENSE by Tolbert Rowe

Let’s Talk LLPA’s

My phone, email and social media has of 6.5% for 30 years with a principal and purchasing a home more aff ordable. In
been lit up since the new Loan Level interest payment of $1,801. reality most borrowers don’t have the
Pricing Adjustments (LLPA’s) for loans resources to pay these fees at settlement
Prior to May 1, a borrower with a credit
sold through Fannie Mae and Freddie and even if they did, I would advocate
score 740 or higher would pay a LLPA of
Mac went into effect on May 1. Aft er this for the alternative of paying a higher

.25% in loan fee which adds $712 to their
date the fee to sell a mortgage to Fannie interest rate to offset the higher loan
closing costs. (.25% X $285,000). Aft er
and Freddie was increased by .375% to fees, or points.
May 1 the LLPA for 740 credit scores was
borrowers with higher credit scores to

increased to .625%, or $1,781 (.625 X The higher loan fees, or points can be
offset the lowering of up-front costs to

$285,000.) This additional $1,069 in fee offset by increasing the interest rate
those with lower credit scores.
income ($,1781 - $712) is being used to through up-front credits or premium
LLPA’s were put in place years ago to subsidize a lower LLPA adjustment for pricing that the lender can use to off set
compensate lenders for the higher those with lower credit scores, allegedly. the higher fees, or LLPA’s.
risk of delinquencies and defaults that Make no mistake, Fannie and Freddie
To offset an LLPA of 2.25% the interest

occurred with borrowers who did will profit nicely from this change, more
rate would need to be increased to 7%
not demonstrate proper management on that later.
which would increase the monthly
of credit through lower credit scores
Prior to May 1, those with a credit score payment to $1,896 or $95 more than
with the financial strength to manage

of 639 and below paid an LLPA of 3.25% the payment at 6.5%. For borrowers with
payments and protect their equity by
for a 5% down $285,000 mortgage or limited funds this is the price they have
having made a sizable down payment.

$9,262 ($285,000 X 3.25). After May 1 to pay. But would it also make sense for

The lower the credit score and lower the
the LLPA was lowered 1% to 2.25% or borrowers who do have the resources
down payment, the higher the interest
$6,412, a savings of $2,850 in closing to pay the loan fee? The answer is no, it

rate. This is called “risk-based pricing”.

costs. does not make sense to pay additional
Here we are once again fi nding ourselves loans fees to get a lower interest rate.

Thus far in this example we have shown
collectively gathering in our like-minded Follow my math.
that in order for a low credit score
tribes to cry “foul” or “not fair” or even
borrower to get the same rate (6.5%) and In this example the worst payment is the
worse.
payment ($1,801) as a high credit score higher payment at 7% and a payment of
To understand exactly what is going borrower, they would have to pay $4,631 $1,896, with an option of paying $6,412
on aft er May 1, let’s look at a real-life more in loan fees ($6,412 low credit to save $95 per month. To break even
example. score fee - $1,781 high credit score fee). and recoup the $6,412 in fees, it would
take 67 months ($6,412 divided by $95

Let’s assume that we are purchasing a The goal of increasing LLPA’s to those

per month savings). The likelihood of
home for $300,000 and putting 5% down with higher credit scores, 779 or lower,
you having a 7% mortgage in 5 ½ years
($15,000) borrowing $285,000 at a rate is to offset the new lower LLPA’s for
is slim to none. It is most likely that you
those with lower credit scores and make
will have the opportunity to refi nance
to a lower rate, possibly within the next
two years when rates drop to the lower
“Your Mortgage Consultant Since 1985”
5% range.
Purchase or Refinance Regardless of how a borrower would
pay the “penalty” for lower credit scores,
either higher closing costs or a higher
interest rate, they will also have to pay
mortgage insurance because the down
payment is less than 20%. In the case
115 E Dover St. Ste 3 - Easton, MD of our 5% down example of $285,000
tolbert@baycapitalmortgage.com C. Tolbert Rowe, mortgage, the monthly premium for
www.baycapitalmortgage.com NMLS Vice President/Lending conventional mortgage insurance would
182844
be $194 if credit score is 660. It jumps to
410-819-3005 / cell 410-310-3520 $218 if the credit score is 640.
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