What Is a High-Priced Mortgage Loan?

A high-priced mortgage loan (HPML) is a type of mortgage designed to provide additional consumer protections for higher-cost loans. These loans are characterized by an annual percentage rate (APR) that exceeds a benchmark rate, indicating a higher-than-average cost for the borrower. Understanding whether a mortgage falls into this category is important because it triggers specific requirements for lenders, such as mandatory escrow accounts and certain appraisal procedures, which aim to safeguard consumers.

Defining a High-Priced Mortgage Loan

A mortgage loan is classified as high-priced when its Annual Percentage Rate (APR) exceeds the Average Prime Offer Rate (APOR) by a specified margin. The APOR serves as a survey-based benchmark, reflecting average interest rates, points, and other loan pricing terms offered to low-risk, prime mortgage borrowers. This rate is publicly available and updated at least weekly by the Federal Financial Institutions Examination Council (FFIEC) on its website.

The specific thresholds that determine an HPML vary based on the loan type. For first-lien mortgages that do not exceed the conforming loan limit eligible for purchase by Freddie Mac, a loan is considered high-priced if its APR exceeds the APOR by 1.5 or more percentage points. For first-lien mortgages with a principal obligation exceeding the Freddie Mac conforming loan limit, often referred to as jumbo loans, the threshold is 2.5 or more percentage points above the APOR.

Subordinate-lien mortgages, such as second mortgages, have a higher threshold. For these loans, the APR must exceed the APOR by 3.5 or more percentage points to be classified as high-priced. The determination of whether a loan is an HPML is based solely on this APR-to-APOR comparison at the time the interest rate is set, not on the loan amount or the borrower’s credit score directly.

Specific Requirements for High-Priced Loans

When a mortgage loan is identified as high-priced, specific federal regulations impose additional requirements on lenders to protect consumers. For first-lien HPMLs, lenders are generally required to establish an escrow account before loan consummation. This escrow account must be maintained for the payment of property taxes and premiums for mortgage-related insurance, such as hazard insurance, and typically must remain in place for at least five years. After this five-year period, a borrower may request cancellation of the escrow account if the loan’s unpaid principal balance is less than 80 percent of the original property value and the borrower is not delinquent or in default.

HPMLs also trigger specific appraisal requirements to ensure the property’s value supports the loan. Lenders must obtain a written appraisal of the dwelling by a certified or licensed appraiser. If the property was recently acquired by the seller at a lower price and is being resold (“flipped”) within a short timeframe for a significantly higher price, a second appraisal may be required. For transactions occurring from January 1, 2025, through December 31, 2025, an appraisal exemption applies to HPMLs with a credit extension of $33,500 or less, meaning an alternative method of valuation may be used instead of a full appraisal. Borrowers are entitled to receive a copy of any appraisal at least three business days before the loan closes.

HPMLs generally cannot include prepayment penalties, which are fees charged if a borrower pays off their mortgage early. This prohibition aims to provide borrowers with flexibility to refinance or sell their homes without incurring additional costs. In limited circumstances, a prepayment penalty might be allowed if it is otherwise permitted by law, does not exceed two years from the loan closing date, and is not imposed if the loan is refinanced by the same lender or an affiliate.

Types of Loans Excluded

Certain types of loans are specifically excluded from the high-priced mortgage loan designation, even if their APR might exceed the APOR thresholds. These exclusions are based on the unique nature or purpose of the loan, which makes the HPML rules less applicable.

• Reverse mortgages, as their structure involves the lender paying the borrower.
• Home equity lines of credit (HELOCs), which are open-end credit arrangements allowing for revolving advances.
• Temporary or “bridge” loans with terms of 12 months or less, particularly when intended to facilitate the acquisition of a new principal dwelling.
• Loans specifically for the initial construction of a dwelling, though permanent financing that replaces a construction loan might be subject to rules.
• Loans made by certain housing finance agencies (HFAs) or specific non-profit organizations.
• Some small creditors operating in rural or underserved areas, or certain insured depository institutions and credit unions with assets below $10 billion and originating a limited number of first-lien loans, may qualify for exemptions from specific HPML escrow requirements.

These exemptions aim to balance consumer protection with the operational realities of smaller lenders and specialized loan products.