Refinancing is set to get more expensive. A new fee, known as the “adverse market refinance fee” (Fannie Mae) or the “market condition credit fee” (Freddie Mac), will be added to most refinance mortgage loans sold to either Fannie Mae or Freddie Mac. The fee is a flat 0.5% or 50 basis points of the total loan amount, adding hundreds or even thousands of dollars. To calculate the cost of refinancing here is a mortgage Refinance Calculator: https://www.forbes.com/advisor/mortgages/mortgage-refinance-calculator/
This brand-new fee comes when mortgage rates are falling to record low rates, and refinance activity is on the rise. Mortgage refinance activity last week was up by 9% from the week ending 10/2/2020 from 9/25/2020. This is also 47% higher than the same time last year, according to the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey.
The reason for the fee is to offset higher risk due to a shaky economy, both Fannie Mae and Freddie Mac said in bulletins they issued. Most refinances, including cash-out refinance, would be subject to the fee. A cash-out refinance replaces your existing mortgage with a new, new, larger mortgage. You withdraw the difference between the old mortgage and the new, and you can use the money however you want.
“As a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty, we are introducing a new Market Condition Credit Fee in Price,” according to a statement by Freddie Mac.
This new Fee Runs Counter to Fed’s Efforts to Keep Costs Down
For a borrower refinancing a $350,000 mortgage, the fee would tack on an additional $1,750. For someone with twice that mortgage, the fee would add $3,500 on a $700,000 refinance.
For some, this fee is counterproductive to efforts the Federal Reserve has made since the start of the pandemic to encourage lending activity while making loans affordable by keeping mortgage interest rates low.
The Fee Also Applies to Some Specialty Loan Refinance Programs
Both Fannie Mae and Freddie Mac have loan programs designed to help a wide variety of borrowers in need. These programs have caps on the total fees that can be assessed, however, the new adverse market refinance fee would apply to these programs, regardless of the cap:
- Fannie Mae’s HomeReady refinance program is designed for borrowers facing financial challenges, and its high loan-to-value (LTV) refinance program offers a chance for borrowers making on-time payments to refinance their mortgages even if their LTV exceeds the maximum for standard cash-out refinances.
- Freddie Mac’s Home Possible mortgage refinance program is for low-income homeowners, and its Enhanced Relief Refinance mortgage program was created for borrowers who can’t refinance because of a drop in property values.
The only loans exempt from the new fee are home loans that qualify for single-closing interim construction financing and permanent financing, which is one mortgage for borrowers building new homes. This end-to-end loan covers buying the land, through the construction phase into the permanent home loan.
What You Should Do If You Want to Refinance
Despite the new fee, some borrowers can still save money on their monthly mortgage payments, and the total interest paid on their loans, by refinancing. Mortgage rates are tracking below 3%, which puts nearly 18 million people in line to save money by refinancing, according to Black Knight, a mortgage technology, data, and analytics provider.
Along with the new fee announced on Wednesday, closing costs should be factored into your decision. Typically, these costs are about 2% to 3% of your total loan amount. Closing costs usually include title and insurance fees, appraisals, and application fees.
Before you refinance calculate your savings if you plan on moving within the next two to three years. You likely won’t save enough money refinancing to make up for the amount you spend in closing fees.
Before you start the process check your credit score. Talk with your mortgage lender to make sure your score is high enough to snag the interest rate you need to save money. Although many lenders are advertising sub-3% rates on 30- and 15-year mortgage refinances, usually only borrowers with above-average credit scores (in the 700 and above range) will qualify.
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