There are more changes coming to conventional loans starting in April 2011. These changes will affect the cost of mortgages and in most cases, they will become more expensive. The pricing adjustments will come in the form of points and depending on the charge, you can either pay them as costs at closing or increase your interest rate to pay them.
These new changes have to do with your credit score and the amount of the down payment. The pricing hits will be any where from .25 to .50 point. This means on a $200,000 loan amount, it could cost you an additional $500 to $1000 in closing costs or the interest rate could increase between .125 to.25%. All of this will depend on the actual spread between interest rates.
The charges come from Freddie Mac and Fannie Mae as they come up with ways to stay solvent. They look at the risks involved in different loan types and scenarios and come up with a "loan level price adjustment". These are not lender fees, but charges directly from Fannie and Freddie. Some examples of risks are:
- Living in a condo with less than 25% equity in the home
- Living in a 2 unit, 3 unit or 4 unit home
- Having a credit score less than 740
- 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
One of the new risks will be simply having a credit score below 740. That will automatically be a .25 point charge. If you are putting 10% down and have a credit score between 680 and 699, currently there is a charge of .75 points, after April it will go to 1.25. That means that $200,000 mortgage will cost an additional $1000.
For those buyers with possible additional charges, talk to your lender. Compare other programs and see which one fits your situation better. Maybe a FHA mortgage may make more sense. It may make sense to pay the fee rather than pay the additional interest rate depending on how long you will keep your mortgage. When you are shopping for a mortgage, make sure that the loan officer you are working with is aware of these things and willing to compare loans with you. You want to make sure that you get the best mortgage program for your own situation.
