Mortgage rates and auto insurance…there’s a connection?by Tim Manni
Ironically, yes. The connection lies in something called loan-level pricing adjustments (LLPAs). Just as car insurers make the riskier drivers pay more, for about four years now Fannie Mae and Freddie Mac have used the same risk-prevention technique with mortgage borrowers.
Loan officer and HSH.com contributing writer Dan Green explains the relationship between car insurance customers and mortgage borrowers like this:
In the world of auto insurance, “riskier” car owners pay higher rates for insurance. The sports car pays more than the minivan; the street-parker pays more than the garage-parker; and the low deductible pays more than the high deductible.
Instinctively, this makes sense. The same concept applies in the world of mortgages. The more risk that you–as an individual–represent to Fannie Mae or Freddie Mac, the more you will pay for your mortgage.
LLPAs are made against a multitude of loan traits. For example:
- Smaller down payments pay more than larger down payments
- Lower FICO scores pay more than higher FICO scores
- Mortgages for investments pay more than mortgages for primary residences
- Multi-unit homes pay more than 1-unit homes
In addition, owners of condominiums may pay more than owners of single-family homes, as well as homeowners with subordinate financing.
Mortgage rates: not one size fits all
The main thing for mortgage shoppers to understand about LLPAs is that the mortgage rate quoted to, say, your neighbor, won’t be the same rate quoted to you. As Green explained above, different borrowers all possess different traits, like differing credit scores, living situations, down payments and more.
How bad can it get?
When researching mortgage rates, borrowers need to realize the difference between what is an “advertised” rate and the real rate they’ll receive. How much will LLPAs increase my mortgage rate?
“LLPAs can add up to 3 percent to any online advertised rate,” explains Green. “They’ve been in effect since December 2007, and have become progressively more punishing over time.”
“Only after submitting a complete loan application will you know what mortgage rate you actually qualify at.”
LLPAs are just another reason why you need to be completely prepared when you apply for a loan. Whether that’s saving more for a larger down payment or making sure you’ve improved your credit score, it’s vital to get the lowest mortgage rate possible to save as much as possible over the life of your mortgage loan.