Mortgage Borrowers With Strong Credit Might Soon Pay More for Their Loans. Here's Why

These days, higher mortgage rates are driving many would-be buyers out of the housing market. But when you sign a mortgage, there are different factors that determine how much that loan ultimately costs you. And now, an impending change to the way certain upfront fees are calculated could make it so that borrowers with strong credit see their costs go up.

A fair amount of upheaval

Most U.S. mortgages are backed by Fannie Mae and Freddie Mac, the two government-sponsored entities that guarantee mortgages and reduce the risk for lenders. Beginning May 1, the upfront fees charged for loans that are guaranteed by Fannie Mae and Freddie Mac will be adjusted to account for changes in Loan Level Price Adjustments, the fees that vary by borrower depending on factors like down payment size and credit score.

Generally, the higher your credit score, the lower an interest rate you can expect to snag on a mortgage. But starting next month, you might end up paying a higher upfront fee for your mortgage if you have great credit.

USA Today reports that a borrower with a credit score of 659 borrowing 75% of their home's value will pay an upfront fee of 1.5% of their loan balance once these new changes take effect. Before those changes, a borrower in that same boat would've been looking at a fee of 2.75%. On a $300,000 mortgage, that amounts to a difference of $3,750 in closing costs, which are fees charged by lenders to finalize a home.

On the other hand, a borrower with a much better credit score of 740 or higher will pay an upfront fee as high as 0.375% starting May 1 for mortgaging 75% of their home's value. That's a big uptick from the current rate of 0.25%.

What's with these seemingly unfair mortgage changes?

The purpose of these changes is to make homeownership more accessible to borrowers of different financial backgrounds, and to make the process of signing a mortgage more fair. But so far, these changes have been the subject of controversy.

While borrowers with higher credit scores will ultimately continue to be rewarded with lower mortgage rates than their counterparts with less favorable credit scores, the changes in the upfront fee structure are effectively penalizing borrowers with great credit. Meanwhile, borrowers whose credit isn't as strong are going to see their fees go down.

It's easy to argue that borrowers with higher credit scores should not have to pay more to subsidize borrowers with worse credit. But unfortunately, that might soon be the case, so those looking to buy a home should brace for higher upfront fees.

This isn't to say that it's in borrowers' best interest to now try to lower their credit scores by being delinquent with bills. Having too low a credit score might mean not being able to qualify for a mortgage at all. Rather, borrowers with strong credit should simply know to anticipate that the cost of signing a mortgage could soon get more expensive.