Higher rates coming for high-balance and second home loans

Higher mortgage costs on the way for some

The Federal Housing Finance Agency announced it will increase fees on certain home loans starting Apr. 1, 2022.

These new upfront fees will affect high-balance and second home mortgages sold to Fannie Mae and Freddie Mac. And, as is the case with most fee hikes, the cost will be passed on to borrowers in the form of higher interest rates.

If you’re in the market for borrowing above the conforming loan limit or finally buying that vacation home, acting sooner than later could save you a lot of money.

In this article (Skip to...)

• Who’s impacted?
• How big will the increased fees be?
• What should you do?

Who will be impacted?

The pricing increases target borrowers applying for conventional high balance loans and those for second properties.

For perspective, conventional mortgages account for about 64% of home purchase loans, according to the National Association of Realtors.

High balance mortgages are any that have a balance above the baseline conforming loan limit — $647,200 in 2022 for about 95% of the U.S.

And a second home is any property you’ll live in part-time, but that won’t be your primary residence.

Why is FHFA raising fees on high-balance and vacation home loans?

The FHFA made the fee adjustments in order to facilitate “equitable and sustainable access to homeownership” while improving Fannie and Freddie’s “regulatory capital position over time,” FHFA Acting Director Sandra L. Thompson said.

Basically, that means the new fees will bolster FHFA’s cash reserves.

The fees are also a way to help first-time home buyers and borrowers with low- and moderate-income get access to credit. First-time homebuyers in high cost areas with incomes at or below their area median income will be exempt from the fees.

The newly raised fees “should provide an opportunity for the government-sponsored enterprises (GSEs) to lower fees on the mission-centric portions of their businesses that primarily serve first-time and low- to moderate-income borrowers,” according to Mortgage Bankers Association President and CEO Robert Broeksmit.

Both fee hikes will go into effect on Apr. 1.

How much are the new conforming loan fees?

The upfront fees for high balance loans bought by the GSEs will increase on a tiered scale between 0.25% and 0.75%, depending on loan-to-value ratio.

Upfront fees for second home loans will increase between 1.125% and 3.875%, also tiered and dependent on loan-to-value ratio.

How much of the new fees lenders absorb and how much they pass to the borrower will be up to the lender.

“It’s hard to model how much, but [the new fees] unequivocally mean higher rates”

In this scenario, lenders will likely inflate the mortgage rate they offer on these types of loans to offset their new incurred cost.

“It’s hard to model how much, but it unequivocally means higher rates. That’s how it works,” according to a community lending expert.

However, if the lender knows they’ll be able to execute the loan sale to Fannie or Freddie before the new fees go into play, they won’t have to price it up, the expert continued.

Apply before costs rise

If you’re considering taking out a loan above the baseline conforming limit or purchasing a second home, two factors should push you to act fast: the FHFA’s fee increase and expected rising interest rates for 2022.

The FHFA set the date of Apr. 1 for the fee hikes “in order to minimize market and pipeline disruption,” according to its press release.

Getting in before the new fees take effect will come down to individual loan characteristics and how long it takes from application to delivery. Giving your lender as much lead time as possible will likely help everyone involved.

“If it’s a purchase transaction, consumers should be very conscious of the contract settlement date,” said Allied Mortgage Group COO Kyle Manseau.

“And ideally, the industry and lenders need a little bit of buffer from the time a loan funds, to post-close, to prep it for delivery to the GSEs — generally a week or so. Realistically, we’re looking at 30 to 40 days.”

With that buffer period in mind, submitting your application around two months before Apr. 1 to allow for the regular processing time could help you avoid the new fees.

If you’re looking at either a high balance loan or a mortgage for a second home, there’s no time like the present to lock in a low rate.