Loan-Level Pricing Adjustments : Raising Mortgage Rates Since 2008

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For some refinancing households, 30-year fixed mortgage rates (with discount points) dipped below 4.000 percent last week. For most others, though, rates like that remain elusive.

It's because of a government-led, rate-changing program known as Loan-Level Pricing Adjustments.

What Is A Loan-Level Pricing Adjustment?

LLPAs were first introduced in April 2008. As government-backed loans were going bad, Fannie Mae and Freddie Mac needed to collect more fees. They didn't want to penalize everyone equally, however, because some loans are inherently more risky than others.

Thus, loan-level pricing adjustments were born.

Loan-level pricing adjustments are, literally, adjustments in the "price" of a loan. Prices determine your mortgage rate. Higher prices mean higher rates.

When they were first launched, loan-level pricing adjustments were the government's way of raising prices on "riskier" borrowers without penalizing "safer" ones. It's a system similar to how auto insurers charge. If your "file" is loaded with risk, your premiums are going to be elevated.

LLPAs can change a mortgage rate by 100 basis points or more.

Click here to get a mortgage rate quote.

Risk Factors That Lead To Loan-Level Pricing Adjustments

The loan-level pricing adjustment system has more than a dozen "risk characteristics". Most borrowers trigger at least one of them and LLPAs are cumulative. When you trigger 4 different adjustments, you pay all four.

Here are just a few examples of price-raising loan traits :

• Having a credit score of 719 or less
• Mortgaging a home as a investment property
• Mortgaging a condo with less than 25% equity
• Mortgaging a multi-unit home (i.e. 2-unit, 3-unit, 4-unit)
• Doing a cash-out mortgage with an LTV over 60%
• Subordinating a second mortgage

There's also a "catch-all" LLPA known as the Adverse Market Delivery Charge. It's assigned to all conforming loans -- regardless of credit score or risk.

LLPAs Are Mandatory. Everyone Pays.

It's important to note that loan-level pricing adjustments are neither discretionary fees, nor "profit" to a bank. They are fees assessed by Fannie Mae and Freddie Mac and there's no getting around them.

When you trigger the chart, you pay the fees. Period. However, you can choose how you your LLPAs are paid.

Your first option is to pay your LLPAs as a traditional "closing cost"; a one-time payment made at closing. For example, if your loan size is $400,000, and your LLPAs add up to 1.000 percent, your LLPA closing cost would be $4,000.

The alternative is to build the LLPAs into your mortgage rate. In general, for each 1.000 percent in adjustments, your mortgage rate rises 0.250%.

This online LLPA calculator can show you what you'll owe.

Want To Skip Your LLPAs?

Loan-level pricing adjustments are specific to conforming mortgages. This means that FHA mortgages, VA mortgages, and USDA mortgages are LLPA-exempt.

You won't pay LLPAs with an FHA mortgage, for example, and that's one reason why FHA mortgages have been so popular since 2008. Before committing to a loan with loan-level pricing adjustments, therefore, check out your options.

Click here to get a rate quote.