Hey all, just a head’s up that if you are planning on financing a second home/vacation property with Fannie Mae or Freddie Mac financing interest rates are about to become more expensive in the upcoming weeks/months (definitely by April 1st though).
https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Targeted-Increases-to-Enterprise-Pricing-Framework.aspx is the announcement and immediately Fannie Mae & Freddie Mac published their own announcements at https://singlefamily.fanniemae.com/media/30326/display & https://my.sf.freddiemac.com/updates/news/news~credit-fees-in-price-updates.
I like Freddie Mac’s because it compares the current pricing adjustments vs. the new ones. Scroll to the bottom of theirs to see the comparison.
For those who aren’t aware, a “pricing adjustment” isn’t an interest rate adjustment, it’s a cost of interest rate adjustment. Meaning given any interest rate, the cost of it will increase if you are financing a 2nd home. So for example right now if you finance a 2nd home, the interest rate you choose might have a cost of .25 points (equals .25% of your loan amount) vs. 0 points if you were instead buying a primary residence.
But soon financing a 2nd home will have a higher cost depending on exactly how much you are putting down. Go back to the Freddie Mac announcement, the very last chart shows what the new pricing adjustments will be (the chart right above it shows the current adjustment). Mortgage lenders base these adjustments on the LTV (loan-to-value, which is the % of the sales price/appraised value (lower of the two) you are financing). You can see with less than 20% down the pricing adjustment is 4.125 instead of the current .25, so to get that same rate, you are paying 3.875% of your loan amount more. The more you put down, the smaller this price adjustment is (20% down results in a 3.375 adjustment, 25% has a 2.125 adjustment, 30% down has a 1.625 adjustment, 40% down has a 1.125 adjustment).
Each lender/bank will adopt this new pricing structure at different times, as the cutoff is loans delivered to Fannie/Freddie by the end of March, meaning loans have to fund a few days prior to then to make the cutoff. I imagine most lenders will still follow the current pricing adjustments until March 1st, then after that we’ll quickly see the dominoes fall.
What is a “second home”? You can find a pretty clear definition from Fannie Mae at https://selling-guide.fanniemae.com/Selling-Guide/Origination-thru-Closing/Subpart-B2-Eligibility/Chapter-B2-1-Mortgage-Eligibility/1033003381/What-are-the-requirements-for-a-second-home.htm.
Lastly, you’ll also notice there are new pricing adjustments for “High balance loans”, or “Super Conforming” as Freddie Mac calls them. These are loans with loan amounts exceeding $647,200 (the 2022 conforming loan limit) up to the county maximum, which you can look up on this nifty map https://www.fhfa.gov/DataTools/Tools/Pages/Conforming-Loan-Limits-Map.aspx. I figure this wouldn’t be as applicable to the subreddit but some may find it pertinent.
Edit: you can usually offset this pricing adjustment by accepting a higher rate. For a hypothetical example let’s say before any adjustments are applied a 3.125% rate costs .500 points (.5% of the loan amount), a 3.250% rate doesn’t cost any points & doesn’t give you any sort of credit, and a 3.375% rate not only doesn’t cost any points but it gives you a credit towards your closing costs in the amount of .500% of your loan amount. In this scenario you are buying a second home with 40% down so we apply the 1.125 price adjustment… now 3.125% costs 1.625 points, 3.250 costs 1.125 points, and 3.375 costs .625 points. Usually the higher the interest rate you choose, the more of a credit you have to cover these adjustments with.