Refinancing is about to become more expensive

By Cheryl MacCluskey

By: Cheryl MacCluskey 

Refinancing with low interest rates is about to get more expensive.

Working in this industry I have seen so many changes since Covid-19, no cash out refinances, no refinancing investment properties, Jumbo market has taken a hit, construction financing harder to find, not that it was easy before Covid-19. As a Senior Loan Officer we are asking the borrowers for more documentation, updated paystubs and credit reports days before closing.

On top of all these changes the Federal Housing Finance Agency (FHFA) has just announced a new fee for mortgages refinances. This fee will hit almost all conventional refinances. All lenders are responsible Refinance fee will be a onetime fee of a 0.5% charge or in layman terms $500.00 for every $100,000 borrowed. Most refinancing homeowners will pay the fee out of pocket but it will reflect in the interest rate.

The new fee applies only to current homeowners who plan to refinance, and had not locked a refinance rate before the Federal Housing Finance Agency announcement on August 12, 2020. Clients purchasing a new home will not be affected. The Adverse Market Refinance Fee has to be paid by lenders, on any refinance loans being sold to Fannie Mae or Freddie Mac. Did you know that Fannie and Freddie buy more than half of all mortgages? The fee doesn’t officially apply until the new date of December 1, 2020. The FHFA originally had September 1, 2020 to have the fee go into effect. It takes weeks for lenders to deliver a closed loan to either Fannie Mae or Freddie Mac. Many lenders have already started including the fee in most unlocked loans. You can be sure lenders are going to pass on these fees in the form of higher rates. So, the big question is how much will the Adverse Market Fee affect the interest rates? Many firms estimate that rates could spike by 0.375% or more but other experts estimate the new fee with only raise rates by 0.125%. So a rate that was 2.875% could actually end up at 3%, which by the way is still very low. My I remind everyone that in the 2018 market interest rates were as high as 18%. My first house I bought, I did pay over 18%. 3% seems like a dream to me.

Let’s put this into perspective, 30 year rates have dropped almost a full percentage since the beginning of 2020, rates are down more than 2% from their recent high in the beginning of 2018. So, even if refinance rates rise due to the new rule, let’s be realistic, they’ll still be incredibly low compared to recent history.

How to avoid paying the new Adverse Market refinance Fee.

Fannie Mae and Freddie Mac purchase a large number of mortgages, meaning their new fee will have a wide-reaching impact. But, there are always ways of avoiding the fee, and the higher rate when you refinance. Jumbo loans, anything over $510,400 in Connecticut won’t be subject to the new fee. Portfolio loans. These are loans that the bank originates and they either hold onto or sell to private investors, rather than selling them to Fannie Mae or Freddie Mac. Because they will not be sold to them the fee does not apply. But, keep in mind Portfolio loans do come with typically higher rates in the first place. The last group is Government-backed loans, including FHA, VA, USDA loans will also not be affected. However FHA and USDA loans will have the continued Mortgage insurance. Loan amounts lower than $125,000, and Home Ready and Home Possible are also exempt. This fee is necessary to cover the losses during the pandemic which are estimated to be over $6 billion, losses for the borrowers and renters during these hard times.

As always, you must shop around for rates. Find an independent Mortgage broker to work with and has your best interest at heart and they can break down the rates and fees to find the best option on your behalf.