Second Home and High-Balance Mortgage Costs Rise: What You Need to Know

Sixty-five percent of homes in the United States are owner-occupied. That means 35% of homes are rentals. Over one-third of homeowners rent out their homes. Grand County's towns, particularly the Winter Park area, Granby, and Grand Lake, consist of 80% second homes. With large numbers like these, you can see why any changes to mortgage rates or fees have the public on alert. Over the past couple of years, the real estate market has been hot, breaking records across the country. People are wondering when or if, it will level out. How high will home values rise? We have already seen an increase in mortgage rates and have heard practically constant rumors that they will rise again. The Federal Housing Finance Agency (FHFA) recently announced and approved an increase in fees for second home loans and high-balance mortgages.

Here is what you need to know about the increase in fees for second homes and high-balance mortgages affecting Grand Lake, Colorado, real estate and real estate across the country.

 

High-balance mortgages - conforming loans nationally is $647,200.  This is based on the average sales price. This is for high-cost areas like Los Angeles, California, or Summit County - Vail and Aspen, Colorado. Grand County does not have this limit because of its low average sales price. Any loan above the $647,200 will be jumbo or private financing.

The Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) are increasing their fees. These entities are government-sponsored enterprises that guarantee and buy most of the home mortgages in the United States. Fannie Mae buys mortgages from large commercial banks; Freddie Mac buys mortgages from smaller banks. Both help banks provide more loans to the communities they serve and keep interest rates low because they mitigate some of the risks. Due to the “significant increase in the 2022 loan limits,” Fannie Mae and Freddie Mac are increasing their fees on all second home mortgages and high-balance loans with settlement dates on and after April 1, 2022. If you are looking at Winter Park, Colorado, homes for sale, don’t wait too long to put an offer on the property.

High-balance mortgages are those for amounts over the conforming limit of $647,200 for a single-family residence. They are available in high-cost metro areas in 18 states, including Colorado. High-balance mortgages are not the same as jumbo loans used for luxury Grand Lake, Colorado, real estate. The loan-level pricing adjustment (LLPA) fee is increasing by .25% to .75%, depending on the loan-to-value ratio, on high-balance loans. This fee will not be applied to loans made to first-time homebuyers with an income less than or equal to 100% of the area’s median income. If the loan is a refinance with a cash-out option, the fees will increase by an additional .75%.

The LLPA fees for mortgages on second homes will increase by 1.125% to 3.875%, depending on the loan-to-value ratio. On a $400,000 home, that could equate to an increased cost of $13,500 in fees. The FHFA says the change will help “minimize market and pipeline disruption.” In other words, they are addressing the inventory shortages for first-time homebuyers by increasing fees on investment properties. If investors purchase fewer properties and Winter Park, Colorado, homes for sale, there will be more inventory available for first-time homebuyers. Whether this will have the desired effect will take time to determine. Typically, real estate investors have greater financial means to absorb additional fees. If the property can still generate cash flow and provide a positive return on investment (ROI), there is no reason to assume they will stop investing in real estate.

 

Basically, you likely will need to put down more money on a second home. This will depend on how the fees are passed down from Fannie Mae and Freddie Mac to the lender and then on to you, the borrower. But it is safe to plan on the lender passing all of the fees down and not absorbing them. Currently, you need to be careful of claiming your Grand Lake, Colorado, real estate as a second home and claiming rental revenue on it. That may not be the case moving forward since the new LLPA fees reduce the difference between loans for investment property and loans for second homes. They are now more similar. Look at the numbers and calculate your ROI after the fees take effect. It is unlikely that they will dip too far into your profit margins.

There is no clear way of knowing how these changes will affect Winter Park, Colorado, homes for sale or the real estate market in the long run. Currently, there are investors who are rushing to complete purchases before the new fees take effect. So, there will likely be somewhat of a slowdown after the fees come into effect because those who were planning on making a purchase have already done so. Initially, it may give investors pause, but as they understand the changes and run the numbers for their ROI, they will likely still move forward. Real estate has been a solid investment strategy for decades. It has overcome many changes and economic upheavals. It is unlikely these fees will change that.

This is a good time to talk with your accountant and examine your cash flow on your Grand Lake, Colorado, real estate. Do you need to adjust your rent rates? Do you have a real estate attorney and a mortgage professional who you can trust?

Working with experienced real estate investment professionals will ensure you are doing what you need to maximize your ROIs. Experienced local Grand Lake realtors have intimate knowledge of the best areas and properties for investing. They have developed deep connections with other investors, realtors, and professionals where they learn of real estate opportunities that are not public knowledge. They are your best asset for building your wealth with real estate.

Brenda Freeman is happy to answer your questions about second homes, investment property, and luxury real estate.