Mortgage costs usually cause yawns and glassy eyes. But when news began circulating last month that updated prices would cost some homebuyers more, it resulted in viral TikTok videos with thousands of outraged comments misinterpreting the new rules.
Many critics asked similar questions: Why did some borrowers with lower credit scores and down payments get better rates on their mortgage rates, while others with high credit scores and larger down payments were charged more? Do responsible borrowers subsidize riskier loans?
The changes made the rounds on cable TV and even landed on Tucker Carlson’s last show on Fox News, where he claimed they would provide incentives for bad behavior. But much of the controversy has centered on the winners and losers of the price updates — not the fact that the most creditworthy borrowers with large down payments would still pay much less. To clear up any confusion, the federal regulator behind the new pricing had to issue a statement: Sparkling credit still pays.
“You’ll still get a better interest rate and loan price if you make a higher down payment and have better credit,” says Bob Broeksmit, president and chief executive of the Mortgage Bankers Association, an industry group.
In fact, the mortgage price update — which applies to loans backed by Fannie Mae and Freddie Mac, the two quasi-government agencies that underwrite or buy the most mortgages nationwide — is old news. It’s been ingrained in what borrowers pay for months.
Fees were recalibrated in January, when the regulator that oversees Fannie and Freddie — the Federal Housing Finance Agency, known as the FHFA — introduced new pricing charts that show how fees are applied to different borrowers and loan types. But the change may have now resurfaced as the updated fees went into effect for loans made to Fannie and Freddie on May 1. Given the time it takes to close new loans and home purchases, the new fee menus had been included in mortgages for some time.
There is little borrowers can do to manage the market forces that have driven up interest rates on mortgages over the past year. They stood at 6.4 percent on Friday, almost double the level at the beginning of last year. But your financial profile – your credit scores, the size of your down payment – also plays a role in paying a loan. That’s where these fees come into play.
The surcharges have been in effect since 2008.
Depending on how borrowers fare, they pay a separate fee for a mortgage secured by Fannie Mae and Freddie Mac.
Those fees, which are a percentage of the loan amount, are often superimposed on a borrower’s base mortgage interest; and the higher your credit score, the less you generally pay. In other words, the riskier the loan is deemed to be, the higher the fee.
These costs are not new. They date back to the 2008 financial crisis, when home prices plummeted and mortgage defaults soared, devastating Fannie Mae and Freddie Mac. These fees helped bolster the companies’ finances and are now used to pay these companies’ guarantees.
Under the new pricing structure, mortgage borrowers with higher credit scores — and down payments from about 15 percent to just under 20 percent — saw costs rise the most, while those with lower scores and down payments had the most significant declines. Critics seized on the apparent disparity of it all, including a graph that focused on how much prices were change – but not the actual terminal costs.
Overall, a borrower’s cost on the average $300,000 loan would be expected to increase by 0.04 percentage points, or $10 per month.
But the details will vary based on your circumstances. Consider a borrower with a credit score of 740 and a 20 percent down payment. On a $300,000 mortgage, her down payment will increase to $2,625, or 0.875 percent of the loan, from $1,500, or 0.5 percent. If the borrower didn’t pay the fee at closing, it could be baked into her interest rate — and the increased cost would add about 0.125 percentage points to the total rate, or $25 per month, according to calculations by Mark Maimon, a senior vice president of finance. president at NJ Lenders.
The change is bigger for a borrower with a score of 630 and a down payment of just under 5 percent — the down payment drops from 3.5 percent to 1.75 percent of the loan amount. On a $300,000 loan, that works out to $5,250, instead of $10,500.
If they chose to include the fee in their mortgage interest, the second borrower would now pay about a percentage point less, amounting to about $193 of their monthly payment.
The bottom line: The borrower in the stronger financial position still pays much less fees, or half the amount paid by the person with the lower score and down payment.
The pricing also reflects factors that may not be obvious: People with down payments less than 20 percent should get private mortgage insurance (which Freddie Mac says can add $30 to $70 per month for every $100,000 you borrow). That means they pay more overall than those with a down payment of 20 percent or more.
The insurance protects the lender, not the borrower – that in turn reduces some of the risk of the borrower defaulting on Fannie or Freddie and shifts it to the private insurer. “So those who put down less than 20 percent are less at risk,” said a recent article by Jim Parrott of the Urban Institute, “and should pay fewer fees.”
The misinformation was fixated on creditworthiness.
Those nuances are not easy to explain in short videos on social media. Instead, many critics thought less creditworthy borrowers got a break at the expense of those with higher scores.
“Have you ever in a million years thought that good credit would actually penalize you if you bought or refinanced a home?” asked an outraged TikTok user.
“I think I will lower my credit score by more than 100 points before buying my first home,” one commenter added.
Those feelings — or a version of them — gained traction on cable TV, social media, and elsewhere. “We hurt the good people,” said Mr. Carlson during his segment.
Sandra Thompson, the director of the FHFA, explained in a statement intended to “set things right” why the agency was making the changes, which began with a review of Fannie and Freddie’s awards and programs in 2021 (the was last updated in 2015). The agency reiterated that it had recalibrated fees on its most traditional mortgages to better reflect the risks of the loans and to strengthen its finances.
“Borrowers with a higher score will not be charged more, so borrowers with a lower score can pay less,” Ms. Thompson said in the statement.
The mission is to make homeownership more accessible.
Providing lower and middle income people with a sustainable path to homeownership is part of Fannie and Freddie’s longstanding mission. And the FHFA said it has made other changes to help support those goals.
Early last year, the agency said it would increase fees on loans that weren’t exactly central to that mission: It raised prices for vacation home loans, larger mortgages (in some high-priced areas, these loans exceed $1 million), as well as on borrowers who refinanced their loans and cashed in on their home equity. “Those increases allowed us to eliminate fees for certain lower- and moderate-income homebuyers,” FHFA officials said.
Gary Acosta, a co-founder and the CEO of the National Association of Hispanic Real Estate Professionals, said he thinks margin borrowers paid an excessive amount of fees relative to the risk they added to Fannie and Freddie’s mortgage portfolios. . But he doesn’t think the price changes are meaningful enough to make a big difference.
“It is not clear that these price adjustments will allow more borrowers to participate in home ownership,” Mr Acosta said. These borrowers are still likely to find better rates through the Federal Housing Administration, he said, a government agency that insures mortgages largely issued to new homeowners, often with small down payments and lower scores than Fannie or Freddie will allow.
Mark Calabria, former director of the FHFA and senior advisor at the Cato Institute, a libertarian think tank, also expects the price changes to have minimal effects on the broader housing and mortgage markets.
But there are practical takeaways. People who live in more expensive areas and need larger mortgages to finance their home, for example, are better off getting mortgages through providers who keep the loans in their own portfolios instead of selling them to Fannie or Freddie.
“It still pays to build your credit and shop around,” said Mr. Calabria, “now even more so.”
