If Rates Are Down, Why Does My Mortgage Cost So Much?
Go to the bank, any bank, and try to buy a house or refinance your current mortgage. Most people who go to the bother of applying for a loan think that they have a chance of receiving one. But approvals right now are running nationally around 35 percent. So the odds against you being approved are 2-to-1. And even if you can get the loan, it will end up costing you more than you expect – sometimes a LOT more.
Interest rates are down, we’re told. A couple weeks ago rates were at a 27-year low. Since then published rates have drifted up by about half a point for no stated reason, but we can guess it is mainly because banks want to limit the number of refinance application. The best way to do that is to make loans more expensive, no matter what the Fed has done.
Remember those 35 percent approval levels look even worse to the banks, which have time and money invested in three loans for every one that goes through.
But the worst news right now is that loans are generally more expensive to get than is indicated by published interest rates. It turns out there are lots of hidden fees in these new loans and many of those fees come not from your bank or mortgage company (though they tend to add theirs, too) but from parties like Fannie Mae.
Hey, now that Fannie Mae is effectively nationalized, along with Freddie Mac, aren’t those companies supposed to be the very instruments through which the federal government will act to save us from this current mess?
No.
Fannie Mae, for one, is piling extra fees onto those historically low rates making them not so cheap at all. The operant phrases here are Loan-Level Price Adjustment (LLPA) and Adverse Market Delivery Charge (AMDC).
AMDC is the easy one. If you live in a community considered to be an Adverse Market, which is pretty much all of California and Florida for two examples, and you try to get a new loan, AMDC will throw a 0.250 percent charge on top of the loan amount. That’s a quarter of a point or $250 per $100,000 just because of where you live.
Is that even legal?
LLPA is much more complex but works the same way, adding points to the loan – even to supposed “no points” loans. Want a smaller down payment? That will be an eighth of a point, please. Have multi-unit property? That’s a point. Have investment property? That’s 1.75 to 3.0 points depending on the loan-to-value. Want to take cash-out? That depends on your loan-to-value and credit score but will run from 0.25 points all the way up to 3.0 points, depending. Want a smaller loan? That will be from an eighth of a point up to 1.5 points, again depending.
And all these fees are cumulative.
Let’s say, then, that you bought your house in Florida three years ago for $170,000 with 10 percent down on a 30-year fixed-rate mortgage at 6.875 percent. While your house appeared to appreciate after you bought it the market has since tanked and your property is worth five percent less than you paid for it.
Now let’s do the numbers.
The house you paid $170,000 for three years ago is now worth $161,500 and your loan balance is $151,000. Compared to a lot of Florida properties that’s pretty good. At least your property is above water – you have positive equity of $10,500 from your residual down payment and the $2000 you paid down the loan principle in the last three years.
You want to refinance your $151,000 balance to take advantage of super-low rates of 4.875 percent that you saw in the newspaper – a whopping TWO PERCENTAGE POINTS less than you signed for only three years ago.
But wait, you live in Florida; that’s a quarter point added to the loan balance for AMDC. The base rate is 4.875 percent, but to get a 30-day lock on that will cost you another 0.875 points. The only way to get the 4.875 rate is to take a chance that it won’t change by the time you close. Your FICO score is 660 and your loan-to-value is above 90 percent, so that’s another 1.75 points. It’s a good thing you don’t need cash out or that your credit score isn’t 659 – you don’t even want to know what those would cost. Finally, your loan amount is under $164,999 so that will cost you another eighth of a point.
Okay, we’re done, so let’s add it up 0.250+0.875+1.75+0.125=3.00 points or $4,530 added to your “no points” loan. If you don’t have the cash to pay this fee directly it gets rolled into the balance of the loan, which goes from $151,000 to $155,530. And that $10,500 in equity you so proudly retained is now down to $5,970 and you still haven’t paid for an appraisal or any of the other fees mandated by folks other than Fannie Mae.
Uh-oh! Financing $155,530 on a $161,500 property is a loan-to-value of 96.5 percent! Fannie Mae won’t go over 95 percent. Even though the additional dollars are going straight back to Fannie Mae in fees, it doesn’t matter. LOAN DENIED.
It happens every day. FHA loans are somewhat easier to get because they’ll finance up to 97 percent, but the same sort of fees apply. This isn’t your bank doing this, it is Fannie Mae. These aren’t numbers I made up, either they are taken directly from the January 8th rate sheet of a national lender and confirmed against the Fannie Mae Selling Guide for the same date. And here’s the worst part: these fees are going to get even higher! Fannie Mae has a new fee schedule going into effect as of April 1st that will charge even more.
Hey, these are mindless bureaucrats just slowly doing their jobs. Many of these charges were in the works long before the current financial crisis. But if that’s the case, why haven’t they been adjusted? Good question.
So if you wonder why you can’t get a good loan despite record low interest rates, this is probably one of the reasons why.
Recent Comments