Refinancing Fees Removed by FHFA: What it Means for U.S. Homebuyers
In a move that will make refinancing more affordable, Fannie Mae and Freddie Mac have dropped a fee that was designed to reduce COVID-related losses. With refinancing fees removed, it may be the time to rework your mortgage.
Mortgage Refinancing Fees Removed by Regulators
This change, which can reduce the amount that you pay after refinancing, could reinvigorate refinancing across the country. For individual homebuyers, it could make refinancing more attractive.
The fee, called the “50-basis point fee” was originally made to reduce losses that were projected to come during the COVID-19 pandemic of 2020. These fees were added to all refinance loans that were delivered to Fannie Mae and Freddie Mac, two massive, government-supported organizations that purchase mortgages on the secondary market.
To make homeownership more affordable, and in light of numerous other factors that have made housing less affordable, the two organizations have dropped the fees, which would have resulted, for most borrowers, in hundreds of additional dollars spent on a mortgage in a single year.
Why Were the Refinancing Fees Implemented?
During the pandemic, many people lost their jobs, either temporarily or permanently. This massive reduction in the total active workforce created a ripple effect in many sectors, including the housing sector. At one point, roughly 5% of mortgages were in “forbearance,” meaning the borrower was temporarily granted a pause in payments. However, these forbearances created financial danger for the major lending institutions. With the recession of 2008 still fresh in the minds of industry experts and regulators, there was a desire for a proactive approach to keep money flowing into the major organizations.
To reduce the financial impact of so many forbearances, the Federal Housing Finance Agency (FHFA) mandated the “Adverse Market Refinance Fee.” This fee was implemented to reduce the chances of significant financial burden to the organization. (The FHA currently holds conservatorship of Fannie Mae and Freddie Mac, so they get to call the shots when it comes to the organizations’ overall activities, although they don’t manage day-to-day operations.)
The fee is paid by the lender who is selling the loan to Fannie Mae or Freddie Mac. But as happens in virtually all markets, the fee was passed on to the consumer. Essentially, borrowers paid more so that lenders could pass the money on to Fannie Mae or Freddie Mac, ensuring the stability of these two important organizations.
But with a gradual (although certainly not complete) recovery from COVID, and increases in economic activity, the FHFA is apparently comfortable allowing Fannie Mae and Freddie Mac to drop the fees.
While forbearances peaked around 5% of all mortgages, there is apparently a reduction in these numbers. A report from CNBC, citing data from Black Knight, says that in July of 2021 that rate of forbearance had fallen to roughly 2%.
This reduction, along with renewed optimism for the overall economy, has given the FHFA enough confidence to allow the organizations to drop the refinancing fee.
This can have a profound impact for anyone considering a refinance of their current mortgage. While the monthly savings might seem paltry, when you look at the annual savings, and especially the full savings over the life of your loan, you’ll see that these changes can be profound…
What Does Removing the Refinance Fee Mean for You, the Homeowner?
As a homeowner, you can now save hundreds of dollars annually and thousands of dollars over the life of a loan compared to what it would have cost just weeks before.
The 50-basis point fee results in roughly a 1/8th of a percentage increase in your total interest rate. This is comes out to about 0.125% on a mortgage rate, which may not seem massive but can make a strong difference. Let’s look at a few examples of how this fee would have played out and how you can now save thanks to dropping the fee.
$500,000 Balance Refinanced to 30-Year Mortgage
Let’s suppose you have exactly $500,000 remaining on your mortgage balance, and you decide to refinance to a 30-year mortgage. Using our mortgage calculator, we see that a balance of $500,000 with a 4% interest rate results in monthly principal and interest payments of $2,387. Annually, this would mean $28,644 in P&I payments. (This is a simplified example and does not include insurance, taxes, and other factors.) Over 30 years, you are looking at a total cost of $859,320.
But what if, by eliminating the fees, we reduced that interest rate by 0.125%. This would leave us with a $500,000 balance and an interest rate of 3.88%, resulting in a monthly payment of $2,353. That’s only $34 a month; is that really a big deal?
Over the course of a year, it certainly could be. $34 a month results in $408 in savings annually.
Okay, many people can afford $408 a year, that may not move their financial needle a whole lot. But over the life of a mortgage, you are looking at excellent savings. If we assume $408 a year in savings, then over a 30-year span you would save $12,240. Now that is a serious savings, and it’s all possible because the FHFA has dropped a seemingly small fee.
This example is, of course, highly simplified. If your balance is lower and your loan terms shorter, the savings will be less. However, if the balance is higher, the savings could be massive. If we assume the same interest rates, but increase the balance to $750,000 (right near the loan limits in San Diego County), the savings can be significant. At 4% interest, we see a total cost of $1,289,160 for the life of the loan. However, if we have an interest of 3.88%, we see a total cost of $1,270,440. Suddenly the total savings are just shy of $19,000!
A Quality Loan, With Refinancing Fees Removed, is Waiting for You
As you can see, these new changes will result in significant savings for anyone who wants to refinance their loan, especially those with large balances. If you are interested in taking advantage of a mortgage refinance, contact our team today. We’ll help you find the right loan and help you get approved for a mortgage that fits your needs, budget, and homeownership goals!