Tumbling mortgage rates just went even lower following news that an unpopular fee on refinances is coming to an end.
When the surcharge was first announced last summer, it created an uproar. It was meant to offset pandemic-related losses for mortgage giants Fannie Mae and Freddie Mac, two government-sponsored enterprises that buy most U.S. home loans and take them off lenders’ hands.
The fee increased the cost of a refi by one-half of 1 percent (0.5%), so a $300,000 loan would have put you on the hook for an additional $1,500. Now that the extra charge is being eliminated, millions of homeowners who have yet to refinance have another reason to do that — besides today’s low mortgage rates.
Refi fee officially becomes history next month
The Federal Housing Finance Agency — the regulator overseeing Fannie and Freddie — says what has been known formally as the “adverse market fee” will be dropped as of Aug. 1, thanks to policies that reduced the impact of the coronavirus crisis on the two mortgage firms.
“The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the adverse market refinance fee will help families take advantage of the low-rate environment to save more money,” says FHFA acting director Sandra L. Thompson, in a news release issued on Friday.
Thompson’s agency expects lenders who were charging borrowers the fee will now pass savings back to consumers. They largely paid the fee through bump-ups in mortgage rates.
Not all refinancers stand to benefit from the elimination of the surcharge, because the fee never applied to:
Loans valued at $125,000 or less.
Freddie Mac’s low-down-payment Home Possible loans or Fannie Mae’s similar HomeReady loans.
Government-insured FHA, USDA or VA loans.
Loans not eligible to be sold to or guaranteed by either Freddie or Fannie.
Most refinance loans have been triggering the fee, as FHFA data shows 72% of all refinance loans were acquired by Fannie Mae and Freddie Mac during 2018, 2019 and the first half of 2020.
Mortgage rates dive as fee is dumped
In mid-August of last year, Fannie and Freddie initially informed lenders about the fee and said it would take effect just a couple of weeks later, on Sept. 1. The Mortgage Bankers Association — a top home lending industry group — reacted harshly.
“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,” MBA president Bob Broeksmit said at the time. “The average consumer will be paying $1,400 more than they otherwise would have paid.”
Mortgage rates spiked on news of the fee. To contain the fallout, the FHFA in late August 2020 said the surcharge would be put on hold until Dec. 1 — and rates quickly plummeted.
Mortgage rates just slid again after lenders found out the fee was being scrapped. According to Mortgage News Daily, the average rate on a 30-year fixed-rate mortgage sank from 3.04% on Thursday — the day before the FHFA’s announcement — to 2.87% on Tuesday.
On 15-year loans, which are a popular refinance option, the average dipped over the same period from 2.50% to 2.31%
“It’s a verifiable fact” that the drop in rates resulted from the ditching of the fee, Matthew Graham, Mortgage News Daily’s chief operating officer, tells MoneyWise. On Friday, Graham wrote in a post that lenders were already removing the fee from any loans that hadn’t yet closed.
A savings bonanza for homeowners
With the pesky refi fee on the way out and with mortgage rates plunging again, homeowners who haven’t yet refinanced have pretty much run out of excuses.
And there are lots of those procrastinators: A recent Zillow survey found 78% of eligible homeowners did not refinance their homes between April 2020 and April 2021, despite historically low mortgage rates.
Thanks to recent declines in mortgage rates, 13.9 million American homeowners can save an average $293 a month by refinancing, says mortgage technology and data provider Black Knight. The estimate is based on last week’s average 30-year mortgage rate of 2.88% in Freddie Mac’s long-running survey.
But about 3 in 10 homeowners (29%) say they’ve been passing on a refi because they “don’t understand the process,” Zillow found.
If you’ve been through the homebuying process, refinancing shouldn’t require you to do anything you haven’t already done before. When you start the application process, you’ll have to provide much of the same income and other information you were asked for when you applied for your initial mortgage.
The process can get a little smoother — and less expensive — if you take the following steps:
The best refi rates go to borrowers with the strongest credit histories, so check your credit score for free and see if you need to improve it before applying for your new loan.
Once you’ve decided what you want from your refi — cash to play with, a lower rate, or both — compare rates being offered by at least five lenders. It’s easy, and a key step toward optimizing your refinance savings.
If you think you can find a better rate or more comfortable mortgage terms, don’t be afraid to negotiate. If the lender you’re working with isn’t willing to budge, there are literally thousands of others who will be more than happy to have your business.