Did you know your Interest Rate is individually unique to your situation? In today’s higher rate environment, it’s important to know how you get the best interest rate and price possible for your Mortgage. In a previous article, we talked about how Interest Rates have a Price and that you can pay extra to lower your rate or get money back to have a higher rate. In this article, we dive into why everyone’s interest rate price is different.
Loan Level Pricing Adjustments (LLPAs)
Imagine you are buying a new Ford F-150 and are looking at two options. One of the trucks has an upgraded bed lining, heavy duty wheel wells, diamond plate toolbox, infotainment package, and heated leather seats. The other truck does not. Which one do you think will be more expensive?
Your mortgage is similar in that it gets more expensive the more add-ons you have. Loan Level Pricing Adjustments, or LLPAs, increase the price of your interest rate and mortgage. Each LLPA adds-on to the overall price and is unique to your situation. The numbers used below come from Fannie Mae’s Loan Level Pricing Adjustments (LLPAs). There are different adjustments for Freddie Mac, FHA, and other investors based on the same factors.
Credit Score (Higher Score is Better)
One of the biggest factors that determines the price of your interest rate is your Credit Score, or FICO. There are three credit bureaus: Equifax, Experian, and TransUnion. These credit bureaus are data collection agencies that obtain information on your credit, payment history, and public records information. Each bureau has a separate score, and your qualifying score is the middle number of the three. There are plenty of resources online that detail how you get a great credit score, but it comes down to a few main factors.
Pay your debt on time, every month.
Keep low balances in your revolving accounts (credit cards, lines of credit)
Avoid Foreclosure, Bankruptcy, Judgements, and Collections
Credit Score | Price Adjustment (LLPA) |
≥ 780 | 0.375% |
760 – 779 | 0.625% |
740 – 759 | 0.875% |
740 – 759 | 1.25% |
700 – 719 | 1.375% |
680 – 699 | 1.75% |
660 – 679 | 1.875% |
640 - 659 | 2.25% |
≤ 639 | 2.75% |
Ex: Purchase loan at 80% LTV
A borrower with a 780 score pays 2.375% less than a borrower with a 638 score. On a $300,000 loan amount that amounts to $7,125 in savings for the same exact interest rate!
Improving your credit score isn’t easy and can take years to get into 780+ range. However, at Leadership Mortgage, we have access to a free Credit Upgrade service that can increase your score within 2-3 weeks. Some of the big success stories are seeing score increases of 60 or more points!
Loan to Value (Lower Loan-to-Value is better)
Your Loan-to-Value (LTV) is a percentage of your loan amount compared to the value of your home. If your loan is $80k and your home is worth $100k, your Loan to Value is 80%. Things get a bit trickier and pricier with loans above 80% LTV, which is why you may have heard “put 20% down payment” in the past. Today, there are many affordable options for loans above 80% LTV and in many cases, these options are just as competitive as options under 80% LTV. However, the general rule is that the lower your LTV, the better price you get.
Loan to Value | Price Adjustment (LLPA) |
< 30.00% | 0.00% |
30.01 – 60.00% | 0.00% |
60.01 – 70.00% | 0.125% |
70.01 – 75.00% | 0.375% |
75.01 – 80.00% | 0.875% |
80.01 – 85.00% | 1.125% |
85.01 – 90.00% | 1.125% |
90.01 – 95.00% | 1.125% |
>95.00% | 1.500% |
Ex: Purchase loan at 750 FICO, including MI
The above LLPAs show that someone borrowing 60% of their home value pays 0%, while someone borrowing over 95% would pay 1.5% of their loan amount. On the same 300K loan, this amounts to $4,500 in savings!
Occupancy Type and Property Type
Occupancy type is the intended use of the property. If you are buying a home and plan on living in it, that would be your Primary Residence. If you plan on renting the home, it would be an Investment Property. If you plan on keeping the home to live in for part of the year, like a vacation home, it would be a Second Home. A Primary Residence does not have a pricing adjustment. The reason Investment Properties and Second Homes are more expensive is because they are considered riskier to the investor. Also, there should be strong incentives to make Primary Residence ownership affordable.
Occupancy | Price Adjustment (LLPA) |
Primary Residence | 0% |
Investment Property | 3.375% |
Second Home | 3.375% |
Ex: Purchase loan at 80% LTV
Property Type is the type of home you are financing. This depends on many factors like how the property is built and how the land is owned. Single-Family Residences, Condos, Manufactured Housing, and Multi-Unit Properties are examples of Property Type. A Single-Family Residence does not have a pricing adjustment.
Property Type | Price Adjustment (LLPA) |
Single Family Residence | 0% |
Condo | .75% |
Manufactured Home | .5% |
Multi-Unit Property | .625% |
Ex: Purchase loan at 80% LTV
An Example of Interest Rate Impact
There are many other LLPAs that can increase the price of your interest rate. The ones we have already covered are the most common and usually the most impactful. The best way for you to find out your specific interest rate and price is to reach out to your friendly local Mortgage Broker.
To close, I am going to give an example of two Mortgage Borrowers and how LLPAs can stack up and have a major impact.
Amy Homebuyer:
Amy is moving to a new city to start her new job and she is buying her home to live in (Primary Residence). She is selling her current home which will give her enough to cover a 20% down payment. She has paid her debts on time and has a credit score of 760. She wants a nice yard, so she is buying a Single-Family Residence on a backroad.
Primary Residence | 0.0% |
760 FICO and 80% LTV | 0.625% |
Total LLPAs | 0.625% |
Bob LaCondo:
Bob is excited because he can finally achieve his dream of having a Second Home at the beach. He is buying a Condo in a nice development just one block from the sand. The last few years were tough, and he missed some of his credit card payments, so his credit score dropped to 690. He recently came into some money and is able to put 25% down.
Investment Property | 3.375% |
690 FICO and 75% LTV | 1.125% |
Condo | .75% |
Total LLPAs | 5.25% |
Bob will be acquiring his rate at a much higher cost, given he has a total of 5.25% of LLPAs being added compared to Amy’s 0.625%. Mortgages are personalized profiles, and your interest rate works in the same way. Understanding how LLPA’s work and the components behind them can give you a leg up in your home financing journey.