Everything you need to know about the new mortgage refinancing fees that take effect on December 1
Mortgage refinancing quickly became the hottest thing in savings, with homeowners lining up to cash historically low mortgage interest rates.
However, the cost of refinancing is about to increase—where he already has, depending on your lender and where you are in the application process. The new “Unfavorable Market Refinancing Commission” is a 0.5% commission that will be charged to refinancings sold to Fannie Mae or Freddie Mac (approximately 70% of all loans), as of December 1.
Here we are going to weigh in on what you need to know:
- The purpose of the new tax
- How lenders will get it to you
- Who is exempt
- How it will affect your bottom line
But first, a little advice: when you are considering when to refinance, don’t just focus on costs; the interest rate also plays an important role in your savings.
Related: Compare personalized refinancing rates from 6 lenders
What is the “Adverse Market Refinance Fee”?
The Federal Housing Finance Agency (FHFA) will charge lenders for unfavorable market refinancing fees on loans they sell to Fannie Mae and Freddie Mac from December 1. cash-out refinancing are subject to the new cost. However, it will not apply to mortgages used to purchase a home.
The reason for these fees is to recoup some of the expenses incurred by these government sponsored companies (GSEs), Fannie Mae and Freddie Mac, due to the economic downturn caused by Covid-19.
“In view of the market and economic uncertainty resulting in increased risks and costs for Fannie Mae, we are implementing a further price adjustment at the loan level,” Fannie Mae explained in a letter announcing expenses.
How will lenders pass these fees on to customers?
The fees will in fact be billed directly to the lenders by the FHFA, who will then – most likely – pass them on to the customers. The way borrowers will be billed may differ from lender to lender. For example, lenders can apply the fees closing costs, add it to the loan amount or increase the interest rate for not a long term
Since the fee is 0.5%, lenders could end up paying $ 500 for every $ 100,000 they borrow.
“Some lenders are including these new fees in their costs. That’s about an eighth of an estimated consumer impact point, ”says Joel Kan, associate vice president of economic and industrial forecasting at the Mortgage Bankers Association. “The impact of the dollar could make a big difference for some people who want to refinance. Depending on your situation, this eighth change may affect the savings potential. ”
If the charges affect the rates by an eighth of a point or 0.125%, a rate of 2.875% will increase to 3%.
Who is exempt from the new refinancing fees?
Some borrowers will escape the new fees, including those with loans of $ 125,000 or less, “nearly half of whom are low-income borrowers at or below 80 percent of the area’s median income,” according to the report. the FHFA.
If you refinance through Fannie Mae’s Home Ready or Freddie Mac’s Home Possible programs, you will also be exempt from fees. Government guaranteed mortgages, including FHA, VA, and USDA loans, are also waived fees.
Fees will only apply to compliant loans, therefore jumbo mortgages, which are loans over $ 510,400 in most metropolitan areas and $ 765,600 in high cost areas, will not be required to pay the fees.
Lenders who do not sell their loans to GSEs – also known as direct lenders or portfolio lenders – will not be charged the fees, which may put them (and their clients) at an advantage.
The advantage of a portfolio lender is that they do not have to meet the requirements of the GSE, which can be advantageous for independent borrowers or those with a credit rating below the minimum requirements. An example of a portfolio lender is the First National Bank of America.
“It is very important to understand that these fees will not be applicable to all refinanced loans,” says Lauren Anastasio, certified financial planner at SoFi, an online lender based in San Francisco. “So one way to avoid the fees is to work with a direct lender who has no intention of selling the loan.”
When shopping for a mortgage, ask if the mortgage company is a portfolio lender. However, portfolio lenders often require a significant down payment. It is not uncommon for their clients to be people who have gone bankrupt or independent borrowers who do not have a regular income.
Should You Always Refinance?
Certainly, rising loan costs will give borrowers a break. After all, the goal of refinancing is to save money, not spend more. However, you have to weigh the added cost against the potential savings, especially as we take advantage of this unique environment at low rates.
AT determine if refinancing makes sense, start by comparing the current average interest rate with your current rate. Experts recommend that you need to lower your interest rate by at least one percentage point for refinancing to make sense. The larger your loan amount, the more you can save by refinancing. Plus, the more you can lower your interest rate, the more savings you’ll get.
Average closing costs vary by lender, but most borrowers should expect to pay between 2% and 5% of the total loan amount in closing costs. On a mortgage of $ 200,000, for example, 3% of the closing costs will total $ 6,000. Adding in the new refinancing fees, which represent 0.5% of the total loan amount, the closing costs rise to $ 7,000.
Let’s say this borrower has an interest rate of 4% with 15 years left on the loan and can refinance into a 15-year mortgage. With a 3% lower rate, the total savings would be $ 10,678.16.
Here is the same loan with different interest rates and with added closing costs.
In the first scenario, the total cost of the loan is $ 266,287.65; in the second, the total cost of the loan, including closing costs and new unfavorable market refinancing costs, is $ 255,609.39. The total savings are $ 10,678.16, which means the additional savings might be worth going through the refinancing process for some borrowers.
If you choose to apply it to other loans (which also accrue interest), the savings can be exponential.
Finally, the best refinancing strategy is to obtain loan estimates from multiple lenders. This will give you a clear idea of how much you can save and if refinancing is the best option for you.
Related: Compare personalized refinancing rates from 6 lenders