Refinancing just got more expensive, thanks to this new fee

Editor's note: The 0.5% refinance fee discussed in this article was originally set to roll out on September 1, 2020. But on August 25, FHFA announced it will delay rolling out the new fee until December 1, 2020. This article will remain on the site for archival purposes.

A new FHFA fee has raised your hoped-for refinance rate

The Federal Housing Finance Agency (FHFA) just announced a hefty new fee for mortgage refinances.

The ‘Adverse Market Refinance Fee’ is a 0.5% charge — or $500 for every $100,000 borrowed — on almost all conventional refinances.

Lenders are responsible for the fee, but they are already passing it on to refinance applicants.

Most refinancing homeowners will not pay the fee out of pocket, but take a higher rate instead. How much higher? Read on to find out.

If you’re considering a refinance, here’s what to know about the new fee and some options to avoid it.

How much higher will refinance rates go?

Note: The new fee applies only to current homeowners who plan to refinance, and had not locked a refinance rate before the FHFA announcement on August 12, 2020. Those purchasing a home will not be affected.

The Adverse Market Refinance Fee has to be paid by lenders, on any refi loan being sold to Fannie Mae or Freddie Mac (the entities overseen by FHFA). Fannie and Freddie buy more than half of all mortgages.

The fee doesn’t officially apply until September 1. However, it takes weeks for lenders to deliver a closed loan to Fannie Mae or Freddie Mac. So lenders have already started including the fee in most unlocked loans — even loans that were already in process but not locked.

Higher fees for lenders are typically passed on to borrowers in the form of higher rates.

So just how much will the Adverse Market Fee affect refinance rates?

One firm estimates rates could spike by 0.375% or more.

One firm estimates refinance rates could spike by 0.375% or more.

To put that in perspective, 30-year rates have dropped almost a full percentage point since the beginning of 2020. And rates are down more than 2% from their recent high in 2018.

So even if refinance rates rise due to the new rule, they’ll still be incredibly low compared to recent history.

Plus, some experts estimate the new fee will only raise rates by 0.125%. So that 2.875% rate you’ve been dreaming of likely went up to 3.0% — at least.

It’s not a welcome time for higher rates. Millions of families are working with tight budgets due to COVID. Low-cost refinancing is crucial for many homeowners.

For some, even a marginal rate hike could push them out of the eligibility zone for refinancing.

How the Adverse Market Fee could affect refinance savings

Take a look at one example.

Imagine you bought a $300,000 house about a year ago. You made a 10% down payment and got a 4% interest rate.

Here’s how your mortgage refinance might look with and without FHFA’s new fee.

*Rates and payments shown are for sample purposes only. Your own refinance rate and payment will vary. Check today's rates here.

In this example, refinancing with the new fee still gets you a lower monthly payment than the original mortgage.

But the homeowner ends up paying more in interest over 30 years than they would have if they hadn’t refinanced.

And they only save $170 per month with the fee versus saving $230 without the fee.

In some cases, the new Adverse Market Refinance Fee could even stop marginal borrowers from refinancing because their debt-to-income ratio will be too high as a result of the new charge.

“This is very disappointing, and the absolute wrong policy at the wrong time,” said Vince Malta, President of the National Association of Realtors.

Malta explained that the new fee “could cost homeowners thousands of dollars, which will destabilize the market and take away opportunity.”

How to avoid the new Adverse Market Refinance Fee

Fannie Mae and Freddie Mac purchase a huge number of mortgages, meaning their new fee will have a wide-reaching impact.

But there are still ways to avoid the fee — and the higher rate — when you refinance.

1. Portfolio loans — Many refinancers’ best bet. These are mortgages that banks originate and either hold onto or sell to private investors, rather than selling them to Fannie Mae or Freddie Mac. Because portfolio loans are not purchased by Freddie or Fannie, the 0.5% fee won’t apply. The downside is that portfolio loans typically come with higher rates in the first place
2. Jumbo loans — Anything over $ in most areas won’t be subject to the new fee, either
3. Government-backed loans — The same goes for government-backed mortgages, including FHA, VA, and USDA loans

However, FHA and USDA loans have continuing mortgage insurance. So if you currently have a conventional loan without PMI, refinancing to one of these likely won’t be your best bet.

As always, shop around to find the best loan type and lowest rate for you.

If you’re not sure what to look for, try working with an independent mortgage broker who can break down rates and fees to find the best option on your behalf.

Background on the Adverse Market Refinance Fee

Coronavirus has seriously destabilized the mortgage market.

With borrowers being laid off and job stability on the line for many, lending has become an extra-risky prospect.

The new Adverse Market Refinance Fee is just another in a long line of moves by mortgage regulators, meant to add an extra financial cushion and reduce risk during these uncertain times.

But unfortunately, the FHFA’s recent move could come at a cost to borrowers.

“Requiring Fannie Mae and Freddie Mac to charge a 0.5% fee on refinance mortgages they purchase will raise interest rates on families trying to make ends meet in these challenging times,” said Bob Broeksmit, president and CEO of the Mortgage Bankers Association (MBA).

“This means the average consumer will be paying $1,400 more than they otherwise would have paid,” says Broeksmit.

“Even worse, the September 1 effective date means that thousands of borrowers who did not lock in their rates could face unanticipated cost increases just days from closing.”

Conflict over FHFA’s new refinance policy

The new refinance charge represents an additional cost at the very time the government is also trying to reduce loan expenses.

For instance, the Federal Reserve is spending $40 billion a month for agency mortgage-backed securities “to help reduce the cost of buying or refinancing a home and stimulate the broader economy,” according to a joint statement from industry leaders.

“This action by the GSEs,” they say, “raises those costs, contradicting and undermining Fed policy.”

Such policy conflicts can be a big deal on Capitol Hill, giving opponents of the new fee grounds to have it reversed. And with an election coming up in a few months, future policy changes aren’t unthinkable.

Low refinance rates are still available

Even with the new fee, it will still be possible for many homeowners to find low refinance rates.

Remember, mortgage rates set new records more than once in the past few months. And they’re set to stay low all year.

As always, the trick is to shop around for a lender offering the best refinance rates for your situation.