Sometimes, we can’t help but compare what we have with what others have. That can be said for all aspects of life, and interest rates are no exception. Athena Paquette Cormier explains why interest rates differ and the role LLPAs (Loan-Level Pricing Adjustments) have in it. She explains how risk can ultimately affect your rate and several other factors that LLPAs consider and how it varies by borrower.
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Why Is My Rate Higher Than My Neighbors Or Co-Workers?
In this episode, we’re going to be talking about LLPAs. I often get the question, “Why is my friend being charged 4.25% for 30-year fixed where you’re quoting me 4.5%?” In this episode, we’re going to talk about why that could be and what is LLPAs. Conventional loans and agency mortgages create a structure for pricing their loans. The interest rate is usually quoted on a baseline and then depending on the risk level of the loan, the rate will change. An LLPA is a Loan Level Pricing Adjustment. What it means is they will change the rate or the loan level pricing will be adjusted depending on different factors. Back to, “Why does my friend gets 4.5% and you’re quoting me 4.25%?” vice versa.
It’s because something is different between those two buyers. What could be different? The interest rate is usually closed on a baseline. The following things can affect your interest rate, property type, credit score, the state the loan is in, the loan amount itself, the amount of down payment, the length of the lock rate guarantee period on the interest rate, how many properties you own, whether it’s an investment property or your own property that you’re going to live in which we call owner-occupied property. Rental properties are also known as non-owner occupied properties. Depending on all those different factors, the rate could change.Make sure that someone looks at your situation, analyzes it, and gives you a quote based on your particular situation. Click To Tweet
Let’s start by saying our baseline is 4.25% 30-year fixed. Let’s say that our rate lock guarantee is 30 days and the credit score of this buyer is 720. Now let’s change it up. That’s our baseline. Let’s take that baseline and assume that everything is the same but instead of a house, it’s a condo. The pricing adjustment or the LLPA adjustment is 0.75 of 1% of your loan amount. That will be added to the fee or you can increase your interest rate to get rid of that fee. You are paying that fee because you’re buying a condo. The higher interest rate is due to the condo. That was the beginning of my thing is I had a client who asked why their rate was 4.5% where their friend was 4.25%. The condo buyer is paying a 0.25% more in the interest rate or 0.75 of a point in points more than the one point loan at 4.25%. It’s something to watch for. This is also true if you buy units.
Let’s look at another situation where the credit score might have changed. Let’s say your credit score is 660 and our baseline was 720. The 660 credit score is damaging to the interest rate. Instead of paying one point for the loan, the person with a 660 credit score will pay two extra points or 0.50% higher in interest rate. That’s huge. That’s why I encourage people to work on their credit scores. Let’s say the person with the 720 credit score gets a 4.375% interest rate with one point. The person with a 660 credit score gets 4.875%. It’s a huge difference. Let’s look at the next one. The next LLPA might be a down payment difference. Let’s say this is an investor. If an investor puts 20% down on a rental property, the interest rate would be 4.875%.
Let’s say they only have 20% down, then the LLPA for putting slightly less down payment would increase the rate to 5.25%. That’s 3/8 a difference or 1.5 points in fee for 20% down versus the 25% down. When you look at rates online or on a billboard, note that the rate may not apply to your situation and you may not have the right payment calculated if the interest rate is 0.50% higher than you expected or what was on the billboard. You want to make sure that someone looks at your situation, analyzes it and gives you a quote based on your particular situation because those LLPAs will get you.
Thanks for joining us. Please join me next episode to learn about swing loans or bridge loans. That’s how to buy your new property without selling your old property first. Join me for my interview on Investors Corner with Aaron Young from Laughlin Associates. He’ll educate us on LLC, who needs them and why we need them. To join our mailing list, all you have to do is text 444999, enter your email address and keyword MORTGAGEFUND and you’ll be automatically added to our mailing list. Thanks for joining me and learning about LLPAs.