Loan-Level Pricing Adjustments : An Explanation And An Online Calculator

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Conforming mortgage rates are low today — the lowest they’ve been in history.  But that doesn’t mean that each qualified homeowner can get them.

If you’ve ever wondered why loan officers don’t give you the best “advertised rate”, it’s not because of a bait-and-switch scheme or something worse.  Most likely, you’re being quoted higher mortgage rates because of a government mandate called Loan-Level Pricing Adjustments.

Defining Loan-Level Pricing Adjustments

Loan-level pricing adjustments are changes to your loan costs as tied to your personal risk traits.

Fannie Mae and Freddie Mac first introduced LLPA in April 2008 and they’ve been a cause of consternation among conventional borrowers since.

Loan-level pricing adjustments tend to surprise people because it’s not exactly a Prime Time News-type story; the first time most people hear about LLPAs is at the point of application. A loan-level pricing adjustment can raise an applicant’s mortgage rate by a full percentage point or more.

Using Auto Insurance To Explain LLPAs

One of the best way to “get” how LLPAs work is to think about it in terms of auto insurance.

For all of us, there is some base insurance rate for which we all qualify.  It’s based on our age, our credit and the ZIP code in which we park our car.  From there, however, policy premiums differ between drivers. Adjustments are made to the base rate.

Drive a riskier car, pay a higher premium.  Have a history of accidents, pay a higher premium. Things like that.

The same goes for mortgage loans — more risk, higher rate — and some of the risk factors include:

• Living in a condo with less than 25% equity in the home
• Having a credit score of less than 740
• Living in a 2-unit, 3-unit or 4-unit home
• Using a home as an investment property
• Doing a “cash out” refinance with less than 40% equity in the home
• Having a second mortgage to subordinate

Each of these traits — historically — increases a borrower’s likelihood of default.  As a hedge, therefore, Fannie Mae and Freddie Mac assess one-time fees to offset that risk.

They’re called loan-level pricing adjustments.

LLPAs Are Not Discretionary Fees

LLPAs are not discretionary fees; sources of profit or padding for the banks.  Nor are they junk fees.  LLPAs are mandatory costs tied to specific loan characteristics.  There’s no flexibility, either.  If you trigger the guidelines, you pay the fees.

This online loan-level pricing adjustment calculator shows just how high your LLPA costs can be. At least you get to choose how you pay them:

1. LLPAs can be paid as a traditional “closing cost”, a one-time payment due at closing.
2. LLPAs can be built into an interest rate. In general, interest rates increase 0.250% for each 1 percent of loan-level pricing adjustment.

It doesn’t take much to trigger the risk-based pricing of Fannie Mae and Freddie Mac; a lot of conforming mortgage applicants do it.

What To Do If You Trigger LLPA

If you’ve triggered the LLPA chart and want to know your options, call or . Depending on your loan traits, there may be non-Fannie /Freddie loans that can give the same great rates, but without the risk fees.

Be sure to ask me about it.  I answer all my own emails.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.