What is a “higher-priced mortgage loan”?

In general, a higher-priced mortgage loan is one with an annual percentage rate (APR) higher than a benchmark rate called the Average Prime Offer Rate (APOR). The APOR is an annual percentage rate that is based on average interest rates, fees, and other terms on mortgages offered to highly qualified borrowers.

Your mortgage will be considered a higher-priced mortgage loan if the APR is a certain percentage higher than the APOR depending on what type of loan you have:

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First-lien mortgages: If your mortgage is a first-lien mortgage the lender of this mortgage will be the first to be paid if you go into foreclosure. In general, a first-lien mortgage is “higher-priced” if the annual percentage rate (APR)  is 1.5 percentage points or more higher than the APOR.

Jumbo loans: If your mortgage is a first-lien “jumbo” loan, it is generally “higher-priced” if the annual percentage rate (APR) is 2.5 percentage points or more higher than the APOR.

Subordinate-lien mortgages: If your mortgage is a subordinate-lien mortgage, sometimes called a second-lien mortgage or junior-lien mortgage, and you go into foreclosure, the lender of this mortgage will be paid only after your first-lien mortgage is paid off. A subordinate-lien mortgage is generally “higher-priced” if the APR of this mortgage is 3.5 percentage points or more higher than the APOR.

Example: Let’s say you’re looking for a mortgage loan that’s not a jumbo loan for a new home you’d like to buy. You decide on a mortgage loan from Lender X with a 6.5 APR. Lender X checks this week’s APOR and finds that it is at 5 percent. Since this mortgage will be the primary, or first-lien, mortgage on your house and because your APR will be 1.5 percentage points higher than the APOR, your mortgage will be considered a higher-priced mortgage loan.

Why does it matter if I have a higher-priced mortgage loan?

If your mortgage is a higher-priced mortgage loan, your lender will have to take extra steps to make sure you can pay your loan back and won’t default. Your lender may have to:

• Obtain a full interior appraisal from a licensed or certified appraiser.

• Provide a second appraisal of your home for free, if it is a “flipped ” home.

• In many instances, maintain an escrow account for at least five years.