Why Small Loans Can Sometimes Cost More

If you are thinking about taking out a mortgage loan whether that be a purchase or refinance, you’re not always necessarily going get the preferred interest rate if your loan amount is on the lower end. It is certainly a contradictory way of thinking, but it is absolutely true.

The reason is because Fannie Mae and Freddie Mac have what are called loan level pricing adjustments which adjust the mortgage pricing based upon several parameters. These parameters include things such as credit score, debt to income ratios, loan program, and loan amount among others.

If you’re going to do an apples to apples comparison on mortgage rates, you need to make sure you’re comparing the true costs.

Here’s why small loans cost more…

It’s simple-it’s profitability for the federal government.

Which scenario is going to pay more to an investor? A person paying 4.25% on a 30 year fixed-rate mortgage with the loan balance of $300,000 or the same scenario in the loan amount is $100,000? Obviously, the $300,000 scenario is much more profitable to the bank over time and as a result, they will reward you with lower priced loan and rate.

Yes, most banks and mortgage professionals will not give you this information.

Here’s an example:

Scenario A- client has an 800 credit score, 50% loan to value, fantastic income and assets, and they are electing to pay monthly escrows. Their loan amount is $300,000. There is only one pricing adjustment and that is .25% for the better due to a credit score over 740.

Scenario B-client has an 800 credit score, 50% loan to value, again strong income and assets, and they are electing to pay taxes and insurance on a monthly basis. However their loan amount is only $80,000. They have the pricing adjustment of .25% for the great credit score as well as another loan amount adjustment in the amount of .375%.

This extra premium of .375% of the loan amount can easily equate to thousands of extra dollars every year in the lender’s pocket. The homeowner gets the mortgage because they’re unfamiliar with this pricing adjustment. It is the cost of doing business with the lower loan amounts.

Here is the pricing on small loans and how it affects their cost.

All other characteristics considered equal-

Loans under $100,000 pricing adjustment of .375%

Loans over 100,000 through $174,000 pricing adjustment of .25%

Loans $175,000 and over no pricing adjustment based upon loan amount.

So when you’re doing your mortgage shopping and you’re comparing Sonoma County Mortgage Loans be aware of of these low level pricing adjustments if your loan amount is under $175,000. The premium for these mortgages has to be paid by someone.

These adjustments are in place because Fannie Mae and Freddie Mac simply do not have as big of an appetite for smaller loans as they do for the bigger ones.

Avoid the extra loan level pricing adjustments on the smaller loans.

Consider your other unsecured debt ie auto loan, credit cards at 7% etc. It might make more sense to cash out refinance and pay off those unsecured revolving accounts while fixed rate money remains favorable. If your minimum loan amount is $175,000 you can avoid the .375% loan level adjustment.

Find the lowest and best mortgage rate quote. Contact us and we can discuss why small loans can sometimes cost more.

 

 

 

 

 

 

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