Watch for Rising Mortgage Costs

Mortgage interest rates have moved up, down and sideways in recent months. Yet apart from that volatility, some key trends could make mortgages more expensive for borrowers regardless of the level at which rates eventually settle. Here's a quick look at five trends this spring and how they could raise borrowers' loan costs.

Feds Restricts Loan Officer Pay

A new federal regulation that restricts how loan officers are compensated might result in higher costs for borrowers.

So far, no one knows exactly how the rule, effective April 1, will play out, but one result could be fewer choices of interest rate and fee combinations, suggests Reggie Green, a loan officer at Firstline Mortgage/Crossline Capital in Chandler, Ariz.

"You're going to see two options," Green says. "Pay all the loan officer's compensation upfront or take a higher rate and the loan officer gets totally paid through the rate."

The rule "is already sounding like it's a shell game," says Gary Parkes, a loan officer at Acopia Home Loans in Woodstock, Ga.

Parkes thinks the rule could be especially problematic for smaller loan amounts because the loan officer won't earn enough to justify the time involved.

"The numbers are just not going to really work," he says.

Loan officers are virtually unanimous in their opposition to the rule, so much so that two trade organizations have sued the Federal Reserve to try to stop it from taking effect.

Fannie, Freddie Raise Risk-Based Prices

Borrowers who have a middling credit score, a small down payment relative to the property's purchase price or little equity relative to their home's value will be subject to higher interest rates on so-called conforming loans that lenders can sell to Fannie Mae or Freddie Mac.

The higher interest rates occur because the two government-controlled entities implemented adjustments to their risk-basing pricing structures, effective March 1 for Freddie Mac and April 1 for Fannie Mae.

Borrowers can avoid the higher rates by paying upfront points, suggests Jim Sahnger, a mortgage consultant at FBC Mortgage in Jupiter, Fla. One point is equal to 1% of the loan amount.

"Depending on the equity in the house and their credit scenario, they're going to pay a minimum of another quarter point upfront to get the lowest rate or their rate is going to be higher," he says.

Risk-based pricing is a good concept, but the adjustments "send the wrong message," says Fred Arnold, a loan originator and branch manager at American Pacific Mortgage in Santa Clarita, Calif.

"It's going to prevent a lot of people from refinancing or being able to qualify for a purchase," he says.

FHA Raises Premiums

Borrowers who opt for an FHA loan insured by the Federal Housing Administration, or FHA, will face higher costs.

Effective April 18, the FHA plans to raise its annual mortgage insurance premium by one-quarter of a percentage point on all 15-year and 30-year loans.

The extra quarter point is intended to bolster the FHA's congressionally mandated capital reserves.

On average, borrowers will pay approximately $30 more per month, according to the Department of Housing and Urban Development, which says this "marginal increase" would be "affordable for almost all homebuyers who would qualify for a new loan."

Parkes has a different take, saying the increase will push some borrowers' debt-to-income ratio beyond the allowable limit to qualify.

"Thirty dollars," he says, "can make or break a deal nowadays."

'Qualified Residential Mortgage' Defined

Another development that eventually might lead to higher loan costs is the federal government's definition, proposed in late March, of a qualified residential mortgage, or QRM.

Federal law will allow lenders to buy and sell whole QRMs, but require them to keep a 5% ownership interest in any mortgages that don't fit the definition.

As proposed in late March, the definition includes a 20% down payment to buy a home, 25% equity to refinance an existing mortgage and 30% if the refinance has a cash-out component. Loans that feature negative amortization, interest-only payments or onerous rate resets wouldn't be allowed as QRMs.

FHA loans and loans guaranteed by the Department of Veterans Affairs are exempt from the rule.

The proposal is open to public comment and subject to revision.

Lower Limits Mean More Jumbos

Borrowers who live in a relatively expensive housing market and who want a loan of more than $625,500 will pay more for their mortgage later this year.

Effective Oct. 1, the top limit for conforming loans is set to drop from the temporary $729,750 to the general $625,500 in high-cost housing markets. Conforming loans are eligible for sale to Fannie Mae and Freddie Mac, and generally have the lowest rates. When the limit drops, borrowers who want a bigger loan will have to get a jumbo, which entails a higher interest rate and tighter guidelines to qualify.

Borrowers have a few options to contain the cost, according to Ginny Ferguson, president of Heritage Valley Mortgage in Pleasanton, Calif.

Those include:

*Getting a loan before the limit drops.

*Making a larger down payment.

*Bringing cash into a refinancing.

*Taking out two loans to keep the first lower than the limit.

Loan limits in lower-cost housing markets also may drop in the future due to lower median home prices on which the limits are based, Trepeta says. That suggests some borrowers in those markets could be pushed into more expensive loans as well.