Refinancing Your Mortgage May Cost You More

Much of the American economy has struggled during the pandemic, but the mortgage industry has been doing surprisingly well. However, borrowers may soon find that refinancing their home will cost them more than expected.

This year the average interest rate for a 30-year fixed-rate mortgage hit a record low, the lowest in 50 years. The record low rates have fueled a boom in the housing market, which will have the 2020 housing market be on track to see $2 trillion in refinances.

“Weaker consumer spending data, which accounts for the majority of economic growth, drove mortgage rates to a new record low,” said Sam Khater, Freddie Mac’s chief economist.

However, all the highs of the housing market this year are about to be dampened by a new “adverse market fee.” The new market fee will take effect on Dec. 1 and is being imposed on lenders by mortgage backers Fannie Mae and Freddie Mac.

Fannie and Freddie guarantee roughly half of the country’s mortgages, which means the new fee’s effects are likely to be widespread.

The new adverse market fee will be levied on the lenders. It will require the lender to pay an extra 0.5% of the loan amount as a one-time charge to the total loan amount. Homeowners are expected to absorb at least some of the new fee’s cost when they refinance their homes.

“Whether you pay it upfront or over the life of a loan, you’ll pay it. And it may make the difference of whether it is worth it to refinance or not for many people,” said Mike Fratantoni, chief economist at MBA.

According to the Mortgage Bankers Association, the new fee works out to about $1,400 added to an average mortgage.

Fannie and Freddie argued that the new fee will not cause the rates to go up for borrowers.

“Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to “go up.” The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate,” wrote Hugh Frater and David Brickman the CEOs of Fannie and Freddie, respectively.

Instead, the companies have taken the position that, when basing estimates off the average mortgage, refinancing homeowners who were previously saving $133 on their monthly payments will now save $118 per month, on average.

Experts have predicted that many homeowners will not be deterred from refinancing their homes despite the additional fee. When refinancing is worth it, the general rule used by borrowers is if the interest rate you pay were to drop by at least 75 basis points (three-quarters of one percentage point) or one percentage point. Due to the record low rates, many borrowers are in a position to be in line with this general rule.

The new adverse market fee does not apply to mortgages with balances below $125,000. It will also not impact jumbo loans, which are too large to be purchased or guaranteed by Fannie and Freddie.

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