If you’ve been sitting on the sidelines and watching others refinance their mortgages in recent months, now may be the time for you to dip your toes into the water, because the tide is getting ready to change!
The Federal Housing Finance Agency (FHFA) plans to implement what it calls the Adverse Market Refinance Fee on December 1, 2020. Originally, the new fee was to go into effect on September 1, but the FHFA has just announced a delay.
This creates a three-month window during which you can still refinance your mortgage without owing an additional 0.5% of the loan amount as a fee.
When you combine that with a loan market that features historically-low interest rates, the conditions may be right to consider refinancing your mortgage.
In this article, we’ll touch on what the Adverse Market Refinance Fee is and how it could impact your refinancing plans.
What Is the Adverse Market Refinance Fee?
Beginning in December, mortgage enterprises Fannie Mae and Freddie Mac will implement an additional fee for many refinanced mortgages: 0.5% of the amount borrowed.
This Adverse Market Refinance Fee is a form of loan-level price adjustment (LLPA) that comes in the form of 50 basis points on refinanced mortgage loans with balances of more than $125,000. That equates to approximately 0.5% of a loan’s full amount in a fee that would be due as part of the mortgage closing costs.
“The more your home refinance costs in terms of the amount of money on your mortgage, the more you’ll pay,” Money expert Clark Howard says. “It’s basically a flat half-percent junk fee on a refinance.”
For example, 0.5% of a $200,000 loan equates to a $1,000 fee. And a $300,000 loan would see a fee of $1,500.
You’ll have to pay that fee on top of other closing costs, which were approximately $5,749 according to a recent study on the national average of closing costs for residential mortgage refinances.
Why Is the Government Charging This Fee on Mortgage Refinances?
Money expert Clark Howard says that the federal government is enacting this fee for two reasons. First, he says, the government needs a way to recoup funds from mortgages that have gone bad during the COVID-19-spurred recession. Second, the government needs to build a “war chest” in anticipation of more mortgage loan defaults in the months ahead.
The Federal Housing Finance Agency describes the fee as “necessary.” In an August 25, 2020, news release, the agency said it’s projecting billions of dollars in losses because of pandemic-related housing expenses:
“Specifically, the actions taken by the [Fannie Mae and Freddie Mac] during the pandemic to protect renters and borrowers are conservatively projected to cost the Enterprises at least $6 billion and could be higher depending on the path of the economic recovery.”
How Do I Avoid Paying This Fee on My Mortgage Refinance?
The new fee won’t apply to new refinance loans of less than $125,000. And the FHFA is exempting homeowners who are working through the federal income-related housing programs HomeReady and Home Possible.
Otherwise, Clark says there likely is nothing that you’ll be able to do to skirt this fee once it is enacted.
Rolling it into the balance of your mortgage at closing is only kicking the can down the road and exposing yourself to additional interest charges.
And no closing costs mortgages are likely to simply bake it into your costs by upping the interest rates on those loans.
How Do I Know If I Should Refinance My Mortgage Right Now?
Now that we’re all on the same page regarding the coming reality of the Adverse Market Refinance Fee, you may be wondering if you should be using this three-month fee postponement to your advantage.
Each individual has a unique financial situation which makes it hard to give a hard-and-fast rule. But Team Clark has some tools that may help you drill down into your mortgage situation to see if you’re a good refinance candidate.
First, read up on Clark’s 30-month breakeven rule for refinancing your mortgage. Most homeowners who are considering refinancing will want to make sure that they can recoup closing costs through interest savings within 30 months’ worth of payments on the new loan.
Next, get a quote on an interest rate for your refinance and put it to the test with Clark’s new Mortgage Refinance Calculator. This tool is not only equipped to give you the numbers you need, but it also can offer advice based on Clark’s breakeven method.
Final Thoughts
2020 has been an awkward financial year that has impacted individuals differently.
If you’re one of the fortunate who has remained gainfully employed and is in a position to make a long-term adjustment to your home mortgage situation, the conditions are ideal to consider a refinance.
The Adverse Market Refinance Fee is an impending reality that may help stabilize our nation’s housing market through these tough times. That can be a good thing. But that doesn’t mean that you have to be the one footing the bill when you refinance — if you hurry.
Review Clark’s breakeven rule and put his new mortgage refinance calculator to work for you. If the results are favorable, proceeding to close on a refinance before December could put a bunch of money back in your pocket.
