Last month, there were rumors that the new mortgage pricing would increase costs for certain home buyers. This caused a stir on TikTok, with many people making viral videos and leaving thousands of comments expressing their anger. However, some of these commenters misunderstood the new pricing rules.
Concerns About Mortgage Rates Pricing
Critics have raised concerns regarding the pricing of mortgage rates. They are questioning why borrowers with low credit scores and down payments are receiving lower rates while those with higher credit scores and down payments are being charged more. They wonder if responsible borrowers are subsidizing riskier loans.
What the Updated Pricing Charts Mean for Borrowers
The recent modifications were widely discussed on cable TV and were even featured on Tucker Carlson’s last show on Fox News. During the show, Carlson suggested that the changes would encourage irresponsible behavior. However, the main point of contention was about who would benefit and who would lose from the pricing updates, rather than the fact that borrowers with good credit scores and big down payments would still pay considerably less. To address any misunderstandings, the federal regulator in charge of the pricing changes had to release a statement emphasizing that borrowers with excellent credit scores would still receive favorable rates.
How Your Credit Score Affects Your Mortgage Fees
According to Bob Broeksmit, who is the president and chief executive of the Mortgage Bankers Association, having a higher down payment and better credit can result in better loan pricing and a more favorable rate.
The update on mortgage pricing that applies to Fannie Mae and Freddie Mac-backed loans, which guarantee or purchase most mortgages in the US, is not new news. It has already been factored into borrowers’ payments for several months.
In January, the Federal Housing Finance Agency (F.H.F.A.), which regulates Fannie and Freddie, introduced new pricing charts for fees based on borrower and loan type. These fees became effective for loans delivered to Fannie and Freddie on May 1, which means they have likely been included in mortgages for some time now due to the duration of loan and home purchase closing processes.
Mortgage interest rates have increased significantly in the past year due to market forces, which borrowers have little control over. However, the amount you pay for a loan also depends on your financial profile, such as your credit scores and the size of your down payment. So, these fees are an important factor to consider nevertheless.
The Role of Credit Scores in Mortgage Pricing
Borrowers will be charged a fee on a Fannie Mae and Freddie Mac-backed mortgage, and the amount of the fee will depend on their qualifications.
The fees added to a borrower’s mortgage rate are a percentage of the loan amount. The fees increase if the loan is deemed to be risky. Generally, borrowers with higher credit scores pay less in fees.
These costs have been around since the 2008 financial crisis. During this time, the housing market experienced a significant decline, and mortgage defaults increased, which had a devastating impact on Fannie Mae and Freddie Mac. To help support these companies’ finances, these fees were introduced and are now utilized to fund the guarantees offered by these companies.
How the New Fees Affect Borrowers’ Monthly Payments
The updated pricing system increased fees the most for mortgage borrowers who have higher credit scores and make down payments between 15 percent to just under 20 percent. Conversely, those with lower credit scores and smaller down payments benefited from reduced fees. Some people criticized this approach for being unfair. Additionally, a chart only highlighted the fee adjustments, not the final costs.
On average, the borrower’s expenses for a $300,000 loan were estimated to increase by $10 per month, with a 0.04 percentage point rise.
The amount you pay upfront when getting a mortgage depends on your situation. For example, if you have a credit score of 740 and a down payment of 20% for a $300,000 mortgage, your upfront fee will increase from $1,500 to $2,625, which is 0.5% to 0.875% of the loan amount. If you don’t pay the fee upfront, it may be added to your interest rate, which could increase it by about 0.125%, or $25 per month. These calculations were made by Mark Maimon, a senior vice president at NJ Lenders.
For borrowers with a credit score of 630 and a down payment of less than 5%, the change will have a bigger impact. This is because the upfront fee will decrease from 3.5% to 1.75% of the total loan amount. Therefore, on a $300,000 loan, the fee will reduce from $10,500 to $5,250.
Incorporating the fee into their mortgage rate would result in the second borrower paying about 1% less. This would reduce their monthly payment by approximately $193.
In short, the borrower who has better financial status will pay significantly lower fees, which can be half the amount paid by the person with a lower credit score and down payment.
Other Factors That Affect the Total Cost of Your Mortgage
The total price of a mortgage takes into account certain factors that may not be immediately apparent. For instance, individuals who make a down payment of less than 20 percent are obligated to purchase private mortgage insurance. This could add an additional cost of $30 to $70 monthly for every $100,000 borrowed, as reported by Freddie Mac. In essence, those with less than a 20 percent down payment end up paying more overall compared to those with a down payment of 20 percent or more.
According to a recent paper by Jim Parrott of the Urban Institute, insurance benefits the lender, not the borrower. This means that the risk of borrower default is shifted from Fannie or Freddie to the private insurer, and those who make a down payment of less than 20 percent pose less risk and should therefore pay lower fees.
Misconceptions around credit scores and mortgage rates spread on social media
It is difficult to convey the subtleties through brief social media posts. As a result, several reviewers believed that individuals who were less dependable borrowers were receiving benefits while those with better credit scores were disadvantaged.
“Have you ever imagined that having good credit could actually work against you while purchasing or refinancing a home?” questioned an agitated TikTok user.
“I guess I have to lower my credit score by more than 100 points before buying my first home,” wrote the commenter.
Various forms of those opinions became popular on television, social media, and other platforms. Mr. Carlson stated during his segment that “We’re causing pain to sincere individuals.”
Sandra Thompson, who is the director of F.H.F.A, issued a statement to clarify why the agency made changes. These changes were initiated after reviewing Fannie and Freddie’s pricing and programs in 2021, with the last update being in 2015. The agency had adjusted the fees on their conventional mortgages to reflect the loan risks accurately and to improve their financial stability.
“In the statement, Ms. Thompson clarified that lower-score borrowers are not subsidizing the costs for higher-score borrowers.”
Experts Weigh In: Will FHFA’s Pricing Changes Help or Hinder Homeownership Goals?
Fannie and Freddie have always aimed to offer a sustainable way for lower and moderate-income earners to own homes. Additionally, the F.H.F.A. has made some other changes to aid in achieving these goals.
Last year, the agency announced that it would increase fees on certain loans that were not essential to its mission, such as vacation home loans, larger mortgages (which can exceed $1 million in high-cost areas), and loans where borrowers refinanced and took out cash from their home equity. The agency explained that these fee increases allowed them to eliminate fees for some home buyers who have lower or moderate incomes.
According to Gary Acosta, co-founder, and CEO of the National Association of Hispanic Real Estate Professionals, borrowers with higher risk are being charged disproportionately high fees by Fannie and Freddie. However, he believes that the recent changes in prices will not have a significant impact.
According to Mr. Acosta, it’s uncertain if the adjustments in pricing will enable more borrowers to become homeowners. He suggested that these borrowers might still have more favorable pricing options with the Federal Housing Administration, which offers mortgage insurance to primarily first-time homebuyers with lower scores and small down payments compared to Fannie Mae or Freddie Mac.
Mark Calabria, a former director of the FHFA and senior adviser at Cato Institute, a libertarian think tank, stated that the pricing changes are not expected to have major effects on the overall housing and mortgage markets. However, individuals residing in expensive areas who require bigger mortgages to buy their homes may benefit from getting mortgages from providers who keep the loans in their portfolios rather than selling them to Fannie or Freddie.
“Even now, it’s worth building your credit and comparing offers,” advised Mr. Calabria.