Mortgage Fees Have Increased for Some High-Credit Borrowers. Here's Why You Still Want the Highest Credit Score You Can Get

You may have read that mortgage fees are going up for borrowers with good credit and are going down for borrowers with lower credit scores. In certain situations this may be true, but there is a lot more to the story.

With that in mind, here's a rundown of the fee most conventional mortgage borrowers have to pay, how it's changing, and what it means to you.

When you get a mortgage, you may have to pay this fee

When you get a conventional mortgage loan, you typically have to pay a fee called a loan-level pricing adjustment, or LLPA. This is a fee that is generally paid in the form of higher closing costs, and can add thousands of dollars to the amount you're required to bring to the closing table. There are certain borrowers who don't have to pay this fee, such as people with extremely high credit scores and down payments over 30%, but the majority of conventional mortgage borrowers have to pay an LLPA to one extent or another.

An LLPA is expressed as a percentage of the amount of the mortgage. In other words, a 1% LLPA on a $400,000 mortgage loan would translate to a $4,000 fee.

LLPAs are a risk-based fee, intended to adjust mortgage rates to reflect the risk to the lender, and to the government-sponsored enterprise backing the loan, which is typically Fannie Mae or Freddie Mac. It doesn't apply to government guaranteed mortgages like FHA and VA loans (these have their own unique fees).

The borrower's credit score is the primary factor in determining LLPA in a mortgage, but it isn't the only one. Other factors include the type of property, if it is a second home or investment property, the balance of the loan, and the borrower's debt-to-income (DTI) ratio.

What just changed?

A new LLPA fee structure went into effect on May 1, and it made some big changes. Most significantly, LLPAs for certain borrowers with high credit scores have increased, while LLPAs for some borrowers with below-average credit scores have decreased.

There is a complex matrix of LLPAs that apply to various borrowers, and the changes (if any) vary dramatically based on credit score and down payment. Having said that, as an example, a buyer of an average-priced home with a 20% down payment and a 740 credit score would pay a LLPA fee that is $1,290 higher than under the old guidelines. On the other hand, a borrower with a 640 credit score and a 5% down payment would pay nearly $3,600 less.

However, this doesn't tell the whole story, and not all groups are affected. For example, most borrowers using a down payment greater than 30% of the purchase price would pay the exact same LLPA as they would under the previous structure. Some high-credit borrowers will even benefit from the changes. For example, all borrowers with down payments of less than 3% will see LLPAs go down under the new rules.

A good credit score is still a very important financial tool

Even if you're in one of the groups that has to pay more than before under the new mortgage fee structure, it's important to realize that the benefits of having a good credit score are likely to dramatically outweigh any negative effects. For one thing, even though some of the LLPAs have changed, the fees are still dramatically lower for borrowers in the higher credit tiers than the lower ones, all other factors being equal. Plus, keep in mind that higher-credit borrowers get better interest rates to begin with.

Consider this example. If you have a 780 credit score and buy a home with a $400,000 fixed-rate mortgage with a 30-year term, you can expect a monthly principal and interest payment of $2,601, based on average rates as of this writing. On the other hand, if your credit score is 630, you can expect a higher interest rate and a $3,037 monthly payment. This $436 monthly difference is greater than any gap produced by the new fee structure.

Plus, your good credit will help with other purchases besides your mortgage. For example, the average borrower with a 780 credit score can expect an APR of roughly 7.1% on a 60-month new car loan. A borrower with a 630 can expect a rate of more than 12%, according to the national averages. On personal loans, credit cards, home equity loans, and more, there are similar differences in borrowing cost based on your credit score.

The bottom line is that in certain situations, borrowers with good credit could end up paying higher fees with their mortgages. But that doesn't mean that a good credit score isn't just as valuable a financial tool as it has always been.