Rising interest rates and stratospheric home prices are in the news. If you are shopping for a home and intend to take out a mortgage, at the time of this writing, the average rate for a conforming 30-year fixed-rate loan is 4.72%, according to Freddie Mac. Conforming loan limits for 2022 are $647,200 unless you are shopping for a home in a high-cost area, then it is $970,800. A high-cost area is defined as an area in which 115% of the local median home value exceeds the conforming loan limit. This means that if you are shopping for a home in an area where the median home value is above $744,280, you are shopping in a high-cost area.
A conforming loan is simply a loan that is eligible for purchase by Fannie Mae (FNM) or Freddie Mac (FRE). They are typically associated with a lower interest rate. Loans that are non-conforming typically have higher interest rates for a few reasons, two of which are fewer lenders in the first place and fewer entities willing to buy the loan and get it off the lender’s books.
As a result of rising home prices, many homeowners have realized that they are sitting on a lot of new equity in their primary residence and are looking for ways to utilize it. Besides selling and downsizing, two of the more popular ways to tap home equity include a home equity line of credit (HELOC) or a cash-out refinance. HELOCs may be a good option if you have short-term cash needs and can pay the loan back in a timely manner. For example, if you want to do some upgrades to your home to increase the value before putting it on the market, a HELOC is a good idea. If you have longer-term cash needs, a cash-out refinance may be a better idea, assuming you are comfortable with making higher mortgage payments over a longer period. Examples of long-term uses of a cash-out refinance include the purchase of a second home or a remodel of your primary residence. If you are considering a cash-out refinance, which results in a high-balance loan, or are considering the purchase of a second home, you need to be aware of a Loan Level Price Adjustment (LLPA).
An LLPA is a fee set by Government Sponsored Entities (GSE) such as FNM, FRE, or the Federal Housing Finance Agency (FHFA). There are several reasons for an LLPA, but primarily they are put in place to price in the probability of a certain amount of default and the resulting loan loss.
Effective April 1, 2022, FNM updated their LLPA matrix. If you do a cash-out refinance which results in a high-balance mortgage, depending on the loan-to-value, it will add between 1.25% and 1.75% to the cost of your loan. If you are purchasing a second home, depending on the loan-to-value, it could add between 1.125% and 4.125% to the cost. This is not an insignificant amount of money.
If you are considering tapping into your home equity, we at Van Hulzen Financial Advisors are happy to run through different scenarios to help you decide which, if any, is the best course of action for your situation.
Written by author: Jarrod Jacobi | Senior Financial Advisor | AWMA®
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