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How to Offset the New Mortgage Refinance Fees
Millions of Americans have decided to take advantage of historically low interest rates and refinance their mortgage. However, if you haven’t already started the refinancing process, there’s a good chance you’re going to be assessed a new fee. Fannie Mae and Freddie Mac recently announced a decision to charge an “adverse market fee” on all refinances starting September 1, 2020.
If you haven’t already gotten the ball rolling on refinancing your home, you’re likely to be impacted by the new charge. Fortunately, there are a few ways you may be able to avoid or offset the new mortgage refinance fees. Shopping around with different banks to get the lowest interest rate possible and improving your credit score can increase savings when refinancing a mortgage.
What is the new mortgage refinance fee?
Fannie and Freddie cited economic and market uncertainty related to the COVID-19 pandemic for wanting to add a 0.5% fee to refinanced mortgages they own. Essentially, the companies fear the economic uncertainty caused by the pandemic will lead to a rise in defaults and foreclosures. To put this in perspective, Fannie and Freddie guarantee about half the mortgages in the United States, which means this new fee could impact huge swaths of people seeking to refinance their homes.
For some background, Fannie Mae and Freddie Mac are officially classified as government-sponsored enterprises. Understanding this distinction isn’t as important as understanding what they do. The companies don’t actually issue mortgages. Instead, they buy loans from banks and other lenders. Fannie Mae and Freddie Mac take these mortgages and turn them into mortgage-backed securities. This next part is key to understanding the new refinance fee.
These securities are guaranteed, meaning no matter what, investors will get paid. It’s also important to remember that the two companies were placed in conservatorship with the Federal Housing Financing Agency (FHFA) in 2008. The FHFA is tasked with restoring the companies to sound financial health.
Moe Mansouri, President of the financial services company Loansteady, believes the new fee is the result of capacity constraint caused by increased demand for refinancing and the difficulty of processing so many applications during a pandemic.
[Read: Compare Current Mortgage Rates]
“Given that rates were at a historic low, lenders have no choice but to constrain capacity by increasing margins amid the refi boom,” says Mansouri. “FHFA sees the greater margins and has decided that lenders have excess profits to spare. They [Fannie and Freddie] ultimately want to use that money to fulfill the FHFA’s stated goal of building capital reserves to end the government’s conservatorship of these agencies.”
Essentially, the two companies see the new fees as a way of getting out of the conservatorship with FHFA.
Okay, there’s a new fee, but is 0.5% really that much? A statement released by the Mortgage Bankers Association claims the fee will cost the average consumer looking to refinance an additional $1,400. Keep in mind that refinancing already comes with fees that can cost thousands of dollars, and it can take a couple of years before you actually pay off those fees and begin to see savings.
“Repercussions [from the new fee] will fall heavily on low-income and financially vulnerable households,” adds Mansouri.
How can I avoid or offset these new fees?
A lot of people are refinancing right now. How many? The latest data shows that the number of refinanced mortgages is up more than 100% compared to the same period last year. This surge is being driven by historically low interest rates. In fact, in a June report from the mortgage data and analytics firm Black Knight, the company’s analysis showed there were another 15.6 million qualified refinance candidates who stand to save an average of $289 a month. The bottom line? Now is still a good time to refinance.
Unfortunately, if you choose to refinance after September 1, and if Fannie Mae and Freddie Mac back your current mortgage, there’s no way to avoid the new fees unless you’ve already submitted the paperwork and have a locked-in interest rate.
“This fee will be baked into the pricing of all lenders for all Fannie/Freddie eligible refinancing,” says Mansouri. “It is essentially a ‘refinance tax.'”
Remember, this new fee only applies to loans backed by Fannie and Freddie, so if you’re planning to refinance, you may want first to find out who owns your mortgage.
Although avoiding the new fees might not be possible, there are ways you can offset the fees.
The best approach to help offset all costs and fees associated with any refinancing is simply shopping around. Research from Freddie Mac shows that something as simple as getting more than one quote can save homeowners an average of $1,500 over the life of a loan. The savings jumps to $3,000 for five quotes. Despite this, the report points out that nearly half of consumers don’t shop around for a better rate.
Before you begin the process of refinancing, it’s also important to check your credit score. The higher your credit score, the better your interest rate will be. If your score is low and you aren’t in a money crunch, take the improve your credit before refinancing. A half-point rate difference doesn’t seem like much, but it could cost you thousands of dollars over the lifetime of your loan.