You may have heard there’s a “new mortgage fee.” And you might have been told to hurry up and refinance NOW to avoid said fee.
While there is some truth to that, it is by no means a reason to panic, nor is it even applicable to all homeowners.
Additionally, it’s possible it may not save you money to refinance now versus a couple months from today, depending on what direction mortgage rates go.
So before we all get in a tizzy and give in to what some are clearly utilizing as a scare tactic, let’s set the record straight.
What the New Mortgage Fee Is and Is Not
- A 50-basis point cost known as the Adverse Market Refinance Fee intended to offset COVID-19 related losses
- It’s not a .50% higher mortgage rate
- It’s an additional .50% of the loan amount via closing costs
- Only applies to mortgage refinance loans backed by Fannie Mae or Freddie Mac
- Home purchase loans are NOT affected by the new fee
- Nor does it apply to FHA loans, USDA loans, or VA loans
Over the past week, I’ve been bombarded by articles warning of the new mortgage fee – most feature something to the effect of “refinance now” and “act fast!”
But in reality, you might not need to do anything different, nor hurry.
Sure, it’s an amazing time to refinance a mortgage, what with mortgage rates hovering at or record all-time lows. No one can argue that.
Still, it all seemed to come to a screeching halt two weeks ago when Fannie Mae and Freddie Mac surprised us with their Adverse Market Refinance Fee, which is designed to offset $6 billion in COVID-19 related losses.
Why would they do such a thing at a time when the economy (and homeowners) are already suffering due to COVID-19? Well, that’s a different story and not really worth getting into here.
The important thing to know is this new mortgage fee only applies to home loans backed by Fannie Mae and Freddie Mac, and only if you’re refinancing an existing mortgage.
It has nothing to do with FHA loans, USDA loans, VA loans, or home purchase loans. Or jumbo loans while we’re at it.
Additionally, they have since exempted Affordable refinance products, including HomeReady and Home Possible, and refinance loans with an original principal amount of less than $125,000.
Some single-close construction-to-permanent loans are also exempt.
In terms of cost, it’s .50% of the loan amount, not a .50% increase in mortgage rate. That could mean another $1,500 in closing costs on a $300,000 loan, which is nothing to sneeze at.
But mortgage rates don’t live in a vacuum, and can change daily, so how much more (or less) you’ll actually pay depends on what transpires between now and the implementation date.
When Does the New Mortgage Fee Go into Effect?
- Applies to loans purchased or delivered to Fannie and Freddie on or after December 1st, 2020
- This means you’d want to apply for a refinance 60 or so days before that cutoff
- Since mortgages are sold and securitized once the loan actually funds
- But remember there’s more to mortgage pricing than just this new fee
The fee was originally supposed to go into effect for loans purchased or delivered to Fannie and Freddie on or after September 1st, 2020, but after much uproar, they just delayed it to December 1st, 2020.
This doesn’t mean you have until December 1st to apply for a refinance in order to avoid the fee.
Since we’re talking purchase of your loan or delivery of your loan so it can be bundled into a mortgage-backed security, there needs to be a buffer.
We have to account for how long it takes to get a mortgage, plus the post-closing stuff that takes place before delivery or sale.
You’d really want to get your refinance in maybe 60+ days prior to December 1st to be safe, though it’s unclear if mortgage lenders will already start baking in the fee even earlier.
If not, you might be stuck paying an additional .50% of your loan amount, either via out-of-pocket closing costs or a slightly higher mortgage rate.
Assuming you don’t want to pay anything at the closing table, your interest rate might be .125% higher, all else being equal.
So if you qualified for a 30-year fixed mortgage rate of 2.5%, it might be 2.625% instead. On a $300,000 loan, it’s about $20 higher per month.
Sure, nobody wants to pay more, but it shouldn’t be a refinance deal breaker for most folks.
And here’s the other thing – mortgage rates might move lower over the next few months due to, I don’t know, COVID-19, the most contentious presidential election in recent history, a stock market that could collapse at any moment, and so on.
In other words, if mortgage rates drop another .25% or .375% by later this year, it’s possible to come out ahead, even with the new fee.
The counterpoint is not to look a gift horse in the mouth. Either way, don’t panic.