Why are we seeing higher interest rates for good credit scores in 2023?

Having excellent credit has long been seen as the golden ticket to the lowest rates and fees when getting a mortgage. However, recent changes by the Federal Housing Finance Agency (FHFA) mean some borrowers with high credit scores may face slightly higher costs. Higher interest rates for good credit doesn’t sound logical, so let’s try to make some sense of it.

Understanding Loan-Level Price Adjustments

Loan-Level Price Adjustments (LLPAs) are fees lenders tack onto mortgage loans. But what exactly are they and why are they charged?

Essentially, lenders view some borrowers as more risky to lend to than others based on factors like credit scores, down payments, and the type of property. The higher the perceived risk, the higher the fee a lender charges to protect themselves.

LLPAs allow lenders to price each individual loan based on its risk profile. A borrower with a low credit score representing more default risk will get charged a higher LLPA fee. On the flip side, those with excellent credit and making a large down payment pose less risk, so they traditionally receive much lower or even no LLPA fees.

These adjustments play a big role in the final interest rate and overall mortgage costs. They’re a way for lenders to manage their risk exposure while still lending to borrowers across different risk levels.

What’s Changing on May 1st 2023

As of May 1st 2023, the FHFA has restructured how these LLPA fees are calculated. While the new system still accounts for credit risk, there is also an emphasis on promoting balanced accessibility to home loans across different credit tiers.

The result? Some borrowers with elite credit may not receive as deep of LLPA discounts compared to the past. Though it seems counterintuitive, the goal is fostering a more inclusive and sustainable mortgage market long-term.

So what does this mean for you? Having exceptional credit will still be advantageous and garner better rates than lower scores. However, the premium pricing may not be as substantial solely based on your credit caliber. Keeping aware of these new fee dynamics is prudent as you plan your homebuying preparations.

The Nitty-Gritty on the New Fees and Higher Interest Rates for Good Credit

Let’s look at some specific examples to understand how these new fees work based on credit scores:

Say you’re looking to get a mortgage for an $800,000 home and put down 15%. With a credit score of 650, your lender fee used to be 3.25% – not cheap! But with the new rules, that fee has dropped to 2.5%.

On the flip side, if your credit score is a stellar 760 in that same scenario, your fee rose slightly from 0.25% to 0.625%. While still much lower than the 650 score, it’s a bump up from before.

So what gives? Why did they decrease fees for lower credit but increase them a tad for great credit? It’s all about expanding homeownership opportunities.

Aiming for a Balance with Low and High Credit Scores

The main goal here is to make buying a home more accessible across different financial situations. By lowering costs for those with lower credit scores and income levels, the hope is that more families can make their homeownership dreams a reality.

At the same time, excellent credit scores still provide a major advantage in overall costs and options. But trimming their fee discounts just a bit helps support a healthier, more balanced mortgage market for everyone.

It’s all about using lender fees strategically to create more equity and inclusion, while still rewarding those with great credit. A novel approach for sure!

High Credit Still the High Ground

Now for current high-credit score borrowers, let’s look at what this means:

Sure, seeing a small fee increase can sting at first. For example, on a $640,000 mortgage, going from 0.25% to 0.625% fee is around $2,400 more upfront. Not insignificant!

However, the big picture is still rosy for those with top-tier credit. You’re still securing the lowest overall rates and fees compared to lower credit tiers. Having excellent credit keeps the most attractive loans and negotiating power at your fingertips.

The new system just trims a portion of the fee discount at the very highest credit levels. But high-credit borrowers by no means are being relegated to the same standing as lower scores. Higher interest rates for good credit are not exactly what we’re seeing here. This is more about the fees and discounts.

Really, these changes are more of a rebalancing than an overhaul. Those with stellar credit remain in the driver’s seat, while allowing more opportunities for other aspiring homeowners to get on the road too.

Fee Changes in Action – Not “Truly” Higher Interest Rates for Good Credit

Sometimes examples help bring things into focus. Let’s look at how the new fees could play out for a couple of hypothetical homebuyers:

Tom has amazing credit – let’s say 780. He’s looking at a $500,000 house. In the past, his sky-high score would’ve gotten him just a tiny 0.25% fee from the lender. Now with the new rules, that fee ticks up to 0.5%.

On a $500K mortgage, that 0.25% increase equals $1,250 more upfront for Tom. Not insignificant, but remember his stellar credit still qualifies him for the lowest interest rates and lots of bargaining power with lenders.

Now meet Jenna with a 650 credit score, also eyeing that $500K home. Before, her fee would’ve been a hefty 3%. But with the changes, that dropped to 2.5%, saving her $2,500 at closing! A solid boost that makes buying more realistic for her situation.

The mortgage pros agree – this new landscape requires some adjusted thinking:

“High credit buyers should absolutely still use that leverage for the best rates and terms,” advises Jason W., credit analyst. “But lower credit folks now have a bit more wiggle room too.”

Credit analyst Edward L. adds: “It’s more important than ever to really understand all the numbers and long-term costs, not just the upfront fees. Careful budgeting is key.”

The Bigger Picture

At the end of the day, these fee adjustments represent a novel approach to making homeownership more accessible across different financial situations. By easing up slightly on the discounts for those with elite credit, it opens more opportunities for buyers with bigger hurdles to overcome. It’s safe to say that this is not necessary a case of “higher interest rates for good credit.” It’s just leveling the playing field a bit in favor of the non-elite.

Does it mean the playing field is 100% level? No. Those with higher incomes and credit scores still have a sizeable advantage overall. But it’s a step towards expanding the homeownership pool in a more equitable way.

Only time will tell how effectively these changes really move the needle for enabling more families to buy homes. But it signals an understanding that the old fee system wasn’t promoting the kind of balance and inclusion that supports a healthy housing market long-term.

Like many new policies, there’s bound to be some refinement needed along the way. Finding the sweet spot for accessibility, affordability, and sustainable risk is an ongoing process. But kudos to taking a novel approach towards that goal.