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A New Mortgage Refinancing Fee Begins Today. Here’s What You Should Know
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A New Mortgage Refinancing Fee Begins Today. Here’s What You Should Know

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A New Mortgage Refinancing Fee Begins Today. Here’s What You Should Know

Record-low mortgage rates mean there has never been a better time to refinance your home loan. But, starting today, the Federal Housing Finance Agency (FHFA) will begin charging a mortgage refinance fee that could impact the cost of your mortgage.

Although the 0.5% fee, known as the “adverse market refinance fee,” will be added to any new refinanced mortgages completed beginning today, some borrowers who have closed their loans within the last several weeks likely already are paying this fee. Lenders who closed on 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.

The new fee is designed to help Fannie Mae and Freddie Mac offset some of the estimated $6 billion in Covid-19-related losses they expect to incur from defaults and forbearance expenses. The two government-sponsored enterprises (GSEs) purchase about 70% of all home loans from lenders and resell them to investors.

“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.

Most borrowers, however, aren’t deterred by the new fee, says Chris de la Motte, co-founder and president at Simplist, an online mortgage marketplace.

“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,” de La Motte says.

Here are a few things borrowers should know about the fee if they’re considering refinancing.

Some Borrowers Are Exempt

Not everyone will have to pay the new fee. If your principal balance is less than $125,000 you are exempt. Borrowers refinancing VA loans and FHA loans 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. But you may not know at the time you apply for a loan whether your lender intends to sell your mortgage to either GSE.

Lenders Might Find Different Ways to Charge the Fee

The FHFA charges the fee directly to lenders, not to borrowers, which means lenders can choose how they pass the cost onto consumers. Some lenders might roll the fee into the interest rate while others might add it as a one-time fee as part of closing costs.

De la Motte says most lenders appear to be absorbing the cost. “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.”

Refinancing Is Still (Most Likely) Worthwhile

Most experts agree this fee isn’t a barrier to refinancing. Currently, average interest rates on 30-year fixed-rate mortgages are around 2.72%, according to Freddie Mac, which is the lowest rate on record.

More than 19 million homeowners can save over $300 a month by refinancing their mortgage and locking in a lower rate. This is a considerable savings, and one that’s not guaranteed to last, as rates could shoot up at any time.

Borrowers should review their loan estimate with their lender, says Alan Chang, vice president of title operations at JetClosing. This will help them see how much the loan will cost, including both interest rate and closing costs. From there, borrowers will be able to determine how much they can potentially save by refinancing.

“Borrowers can get a quote from their preferred lender at any time to better understand how much they can potentially save, even with the 0.5% fee included,” Chang says.

Keep in mind that credit score and debt-to-income ratio plays a major role in the interest rate you qualify for, so you do have some control over your interest rate. With so many lenders in the mortgage space today, borrowers also have the advantage of lenders competing for their business. This is where shopping around for a mortgage can be helpful.

The Fee Might Not Last

How long the adverse market refinance fee stays in place is anyone’s guess. Most experts are unsure when the FHFA will lift the fee, with some saying it could take a few years or longer.

Nevertheless, the new fee is not putting a noticeable dent in refinancing. Mortgage refinance applications are rising, according to the Mortgage Bankers Association’s Weekly Mortgage

Applications Survey for the week ending Nov. 20. Refinance applications jumped 5% from the previous week and were 79% higher than this time last year.

“It’s difficult to know how things will shake out once a (Covid-19) vaccine has been widely distributed. Our expectation is that this fee will not stay in place longer-term but we don’t know if it will be gone in a couple of months or in a couple of years,” de la Motte says. “Nevertheless, we don’t believe it is having a major impact on consumers, and we think it won’t deter most people from refinancing their mortgages.”

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