Most people are not aware that Fannie Mae and Freddie Mac have a whole chart of pricing “add-ons”. Add-ons are an amount (usually expressed in points) which are added on to the “base rate” in certain situations. Each 1.00 point is 1.00% of the loan amount. Another example is that a .25 point is a .25% of the loan amount. On a $400,000 loan a .25% is $1,000.
Some examples of situations when add-ons are required:
condo loans over 75% loan-to-value
multi-family properties (2 unit, 3 unit or 4 unit properties)
extended lock-ins beyond the standard 30-60 days
lower credit score
Credit scores make for a good example. Over the last few years, Fannie Mae and Freddie Mac have been raising the minimum credit scores it takes to get the best rate, which results in driving up the cost of the add-ons. Recent credit score add-ons are:
• 660-679 there may be a 2.50 point add-on.
• 680-699 there may be a 2 point add-on.
• 700-719 there may be a 1 point add-on.
• 720-739 there may be a 0.50 add-on.
• 740-779 no add-on.
• 780+ there may be a reduction in points, by a 0.25 point.
Some of the other recent add-on costs are:
Condos over 75% loan-to-value (which means if you have less than 25% down) have a 0.75 add-on.
Multi-family properties are a 1.00 point add-on.
Here is one specific example: if the current 30 Year Fixed rate is 4.25% with 0 points, but you want to get a mortgage for a condo and put 20% down, the rate will be 4.25% with 0.75 points. Or, a mortgage lender can build the add-in into the interest rate, and quote 4.50% with 0 points instead of 4.25% with 0.75 points.
Or, if you want a mortgage for a condo with 10% down and you only have a 680 credit score, it may be 4.25% with 3.25 points (results from both a 2.50 point add-on for the lower credit score, and 0.75 for the condo add-on).
Or, if you want to buy a single family home with a 5% down payment, and have a 703 credit score, you may pay a 1.25 point add-on (results from both a 1.00 point add-on for the lower credit score, and 0.25 for the lower down payment of 5%).
Since this multitude of add-ons cannot be priced into an advertisement because it is too complicated, and an advertiser cannot assume what your credit score is, what type of property you are buying and what your down payment is, many rates you’ll see in public may not apply to your situation.
If you follow my blog, you know that this all ends in the same advice I always give, ask a lot of questions, assume nothing, choose a lender carefully, know as much as you can about who you are dealing with, and do not shop strictly by price.