The New Mortgage Refinancing Fee You Need To Know About
Dear Rich Lifer,
One part of the economy that has been doing well lately is the mortgage industry. Due to record-low mortgage rates, there has never been a better time to refinance your home.
According to Freddie Mac, the rate on a 30-year-fixed-rate mortgage fell from 3.65% in mid-March, to 2.27% in mid-November, the thirteenth record low this year.
In fact, so many people are refinancing that the housing market is on track to see $2 trillion in refinances in 2020, second only to 2003, according to the Mortgage Bankers Association.
However, beginning December 1, the Federal Housing Finance Agency (FHFA) will begin charging a mortgage refinance fee that could impact the cost of your mortgage.
Known as the “adverse market refinance fee,” this 0.5% charge will be added to any new refinanced mortgages with Fannie Mae or Freddie Mac. However, some borrowers who have closed their loans within the last several weeks likely already are paying this fee.
Lenders who have closed loans and plan to sell them to Fannie Mae or Freddie Mac may have included the fee in anticipation of selling the loan after today.
The fee could cost homeowners $500 for every $100,000 they borrow.
There are a lot of questions around why the fee exists and who exactly it will apply to, so today we will be breaking down this new refinancing fee and answering your questions about what to expect.
Plus, we share a way for you to start earning monthly real estate investment income now.
Why Does The Fee Exist?
Mark Calabria, director of the FHFA, said at a conference earlier this fall that the new charge is meant to stabilize Freddie Mac and Fannie Mae’s finances after borrowers got $6 billion worth of assistance thanks to coronavirus protections.
The FHFA reports that the fee will help cover losses related to actions taken during the pandemic to help renters and borrowers such as offering forbearance programs, buying loans in forbearance and modifying mortgage terms to reduce or simplify monthly payments.
“In light of market and economic uncertainty resulting in higher risk and costs incurred by Fannie Mae, we are implementing a new loan-level price adjustment,” Fannie Mae explained in a letter announcing the fee.
Initially, the fee was supposed to go into effect on September 1; however, due to industry and political backlash, the FHFA announced that it would delay the implementation of the fee until December 1.
Is Anyone Exempt From The Fee?
Yes. There is currently a threshold for the fee. If your principal balance is less than $125,000 you are exempt.
Borrowers refinancing VA loans (for military veterans and service members) and FHA loans (designed for low or moderate-income borrowers) also are exempt from this fee.
If you’re buying a home and taking out a new home loan, you’re also exempt.
The only mortgages that are required to pay are those that lenders sell to Fannie Mae and Freddie Mac. However, when you apply for a loan, you may not be aware of whether your lender intends to sell your mortgage to either of these enterprises.
Practically speaking, two-thirds of American home mortgages are refinanced through one of these companies, so the odds you will end up owing the fee are very high.
Additionally, if you have a “jumbo loan,” basically a loan with a value of $510,400 or more in most parts of the United States (or $765,600 or more in more expensive areas), you will also not be subject to this fee.
These types of loans are too big to be sold to Fannie or Freddie and therefore, are not eligible for additional fees.
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How Are Lenders Applying the Fee?
The FHFA will charge the fee directly to lenders, not to borrowers, meaning lenders can choose how they pass the cost onto consumers.
For most borrowers, the fee will be charged in the form of either extra costs at closing or higher interest rates on the new mortgage.
There seems to be conflicting opinions over how much the fee will actually affect borrowers.
Chris de la Motte, co-founder and president at Simplist, an online mortgage marketplace, reports:
On the whole, borrowers don’t seem too concerned about this fee because it’s baked into the rate they’re being offered by their lenders. The effect this is having on consumers is negligible, and lenders are absorbing most of the cost.
He goes on to note that, “Since many lenders have benefitted from both higher margins and higher volumes this year, they’re able to absorb the cost and still offer rates that are at all-time historical lows.”
Others are less optimistic and assume that lenders are pretty much guaranteed to pass the cost of the fee on to borrowers.
Mike Fratantoni, chief economist at Mortgage Bankers Association (MBA), states, “Whether you pay it up front or over the life of a loan, you’ll pay it.” He estimates that the added cost will result in a refinance that is 10 to 15 basis points higher than a purchase loan.
Greg McBride, Bankrate’s chief financial analyst, tells borrowers to pay the fee up front, if they can afford to. Otherwise, the fee will be charged through a higher interest rate or larger principal loan balance, which will wind up costing more money over time.
Should You Still Refinance?
In their own defense, Fannie and Freddie argue the fee will not cause the cost of homeowners mortgage payments to go up because a refinance usually lowers payments.
They say for an average refinanced mortgage, homeowners can estimate a reduction in savings of about $15 per month due to the fee. Refinancing homeowners who were previously saving $133 on their monthly payments, will now save $118 per month, on average, they said.
At the end of the day, most experts agree that this fee should not be a serious deterrent to refinancing.
The best practice is always to shop around for the best rates and terms and not let the fee get in the way of that.
As we mentioned before, interest rates are still the lowest on record, which means that more than 19 million homeowners can save over $300 a month by refinancing their mortgage and locking in a lower rate.
To a Richer Life,
The Rich Life Roadmap Team