Mortgage refinancing has quickly become the belle of the savings ball, with homeowners lining up to cash in on record-low mortgage interest rates.
However, the cost of refinancing is poised to rise—or it already has, depending on your lender and where you are in the application process. The new “adverse market refinance fee” is a 0.5% fee that will be charged to refinances sold to Fannie Mae or Freddie Mac (about 70% of all loans), starting on Dec. 1.
We’ll weigh in here on what you need to know:
- The purpose of the new fee
- How lenders will pass it on to you
- Who is exempt
- How it will affect your bottom line
What is the ‘Adverse Market Refinance Fee’?
The Federal Housing Finance Agency (FHFA) will charge lenders the adverse market refinance fee on loans they sell to Fannie Mae and Freddie Mac starting on Dec. 1. Both standard refinances and cash-out refinances are subject to the new cost. It won’t, however, be applied to mortgages used for buying a home.
The reason for the fee is to recoup some of the expenses incurred by those government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, due to the economic downturn caused by Covid-19.
“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.
How Will Lenders Pass This Fee on to Customers?
The fee actually will be charged directly to lenders by the FHFA, who will then—most likely—pass it on to customers. The way in which borrowers will get charged might differ from lender to lender. For example, lenders might tack the fee on to the closing costs, add it to the loan amount or raise the interest rate.
Since the fee is 0.5%, lenders might end up paying $500 for every $100,000 they borrow.
“Some lenders are building that new fee into their costs. It’s about one-eighth of a point estimated impact on consumers,” says Joel Kan, associate vice president of economic and industry forecasting at the Mortgage Bankers Association. “The dollar impact could make a big difference for some people who want to refinance. Depending on your situation, that one-eighth change can affect the savings potential.”
If the fees affect rates by one-eighth of a point or 0.125%, then a 2.875% rate will jump up to 3%.
Who Is Exempt from the New Refinance Fee?
There are some borrowers who will escape the new fee, including those whose loans are $125,000 or less, “nearly half of which are comprised of lower income borrowers at or below 80% of area median income,” according to the FHFA.
If you refinance through Fannie Mae’s Home Ready or Freddie Mac’s Home Possible programs, you also will be exempt from the fee. Government-backed mortgages, including FHA, VA, and USDA loans, are also cleared from the fee.
Lenders that don’t sell their loans to the GSEs—also known as a direct lender or a portfolio lender—won’t be charged the fee, which can put them (and their customers) at an advantage.
The advantage of a portfolio lender is that they don’t have to meet GSE requirements, which can be beneficial for self-employed borrowers or those with credit scores that fall below minimum requirements. One example of a portfolio lender is First National Bank of America.
“It’s very important to understand that this fee will not be applicable to all refinanced loans,” says Lauren Anastasio, a Certified Financial Planner at SoFi, an online lender based in San Francisco. “So one way to avoid the fee is to work with a direct lender who does not intend to sell the loan.”
When shopping for a mortgage, ask if the mortgage company is a portfolio lender. However, portfolio lenders frequently will ask for a huge down payment. It’s not uncommon that their customers are people who have had bankruptcies or are self-employed borrowers who don’t have regular incomes.
Should You Still Refinance?
Certainly, a hike in loan costs will give borrowers pause. After all, the point of refinancing is to save money, not spend more. However, you should weigh the additional cost against the potential savings—especially as we enjoy this unique low-rate environment.
To figure out if refinancing makes sense, start by comparing the current average interest rate with what your existing rate is. Experts recommend you’ll need to reduce 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. Additionally, the more you can cut your interest rate, the more savings you’ll enjoy.
Average closing costs vary by lender, but most borrowers should expect to pay between 2% to 5% of the total loan amount in closing costs. On a $200,000 mortgage, for example, 3% closing costs will total $6,000. Adding in the new refinance fee, which is 0.5% of the total loan amount, closing costs jump up to $7,000.
Let’s say this borrower has a 4% interest rate with 15 years left on the loan and they can refinance into a 15-year mortgage. With a lower 3% rate, the total savings would be $10,678.16.
Here is the same loan with different interest rates and with closing costs added.
In the first scenario, the total loan cost is $266,287.65; in the second, the total loan cost, including closing costs and the new adverse market refinance fee, is $255,609.39. The total savings is $10,678.16, which means the extra savings could be worth going through the refinancing process for some borrowers.
If you choose to apply it toward other loans (which also rack up interest), the savings can be exponential.
Finally, the best strategy for refinancing is to get loan estimates from several lenders. This will give you a clear picture of how much you can save and whether refinancing is the best option for you.