What is a new mortgage refinance fee?

11 Sep

As interest rates continue to hit new lows, many homeowners have considered refinancing their mortgage. If you fall into this category, it is best to get the process started if you want to avoid a new mortgage refinance fee that is being rolled out by Fannie Mae and Freddie Mac, the government-sponsored mortgage giants who back the majority home loans. 

These two companies claim they need to offset billions in losses from defaults and other coronavirus crisis related issues which is why they are applying a new fee to refinances. The surcharge was supposed to kick in Sept. 1st but has recently been pushed back to Dec. 1st.

The postponement “may provide lenders a bit more breathing room,” says Christian Wallace, director of purchase sales at online lender Better.com in a recent Moneywise article.  “For the borrowers, this delay could mean the opportunity to avoid incurring the surcharge fee.”

Unfortunately, lenders are expected to start adding the fee into their mortgage rates earlier than December, so if you are in the market to refinance your mortgage, now is the time. 

Why is now a great time to refinance?

Interest rates have been dropping and have stayed under 3 percent for months now, which makes refinancing attractive to tens of thousands of homeowners. According to data from Better.com, refinance applications are up 248 percent since March 1st.

As lenders have been notified that the fee would start being applied at the beginning of September, they have raised their rates to incorporate the new fee. After the fee was announced, rates for a 30-year fixed rate mortgage went from 2.92% to 3.14%, according to the Mortgage News Daily. 

Once the new fee was delayed, rates fell again but are expected to increase again as we get closer to December. Once it is put in place, the fee requires lenders to pay 0.5% of the loan amount on refinance mortgages over $125,000 if they are sold to Fannie or Freddie. As an example, if you borrowed $200,000 you would be on the hook for a refinance fee of $1,000.

In most cases, the fee will be passed on to loan applicants via a higher interest rate. According to the Mortgage Bankers Association, the average cost to a borrower will run about $1,400. 

Can you avoid the fee?

Start the refinance process right now if you want to avoid the new fee. The new fee will start being applied to loans sold to Fannie Mae and Freddie Mac after December 1st. However, lenders are certainly aware that the delivery of loans to Freddie or Fannie can be delayed due to loan backlogs or other delays. This means that a loan that is closed and funded in November might not end up in Fannie or Freddie’s hands until after December 1st when it will incur the new fee. 

Due to this possible lag, most lenders will start adding the fee into their interest rates as soon as October. “Mortgage rates could begin to see modest increases once lenders begin to reapply the price adjustment,” says Matthew Speakman, an economist with Zillow in the Moneywise article. “For now, mortgage rates are enjoying another strong stretch back to long-term lows.”

You should start the process immediately if you are serious about refinancing. Get quotes from multiple mortgage lenders and make sure they have time to process your loan before the fee starts taking effect. Lenders are currently expecting a large influx of applications as borrowers move to refinance before the fee starts being applied. 

Once you find a rate and lender that you are comfortable with, submit the application and lock the rate in so it cannot be increased. 

Remember to Lock Your Rate

If you fail to lock your rate there is a good chance you could end up being subject to the 0.5% surcharge fee that will be applied to refinance applications. Lenders are expected to roll the fee into their mortgage rates in the next month or so which means that you’ll be paying for the fee over the life of the loan.

The best advice is to simply shop around for the lowest interest rate. According to Freddie Mac, it is best to get at least five rate quotes. Data shows that by getting at least five quotes you should say on average, at least $3,000 over a person who only gets one quote. 

When it comes to the new fee, experts recommend getting your refinance in the books by the end of September if you wish to avoid the new refinance fee. 

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