Refinancing has become cheaper
Jul 16, 2021 The Federal Housing Finance Agency (FHFA) announced that it has finally canceled refinancing fees in unfavorable markets.
The additional commission introduced last year raised either interest rates or closing costs on all qualifying refinancing loans.
Removing the commission will make refinancing less costly for millions., with the direct result of lower refinancing rates or commissions. And the good news is that these lower costs are starting now.
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What is a refinancing fee in an unfavorable market?
In August 2020, FHFA submitted its proposal for a new refinancing commission in an unfavorable market.
The fee that was applied to all qualifying refinancing loans was 0.50% of the borrower’s loan amount.
But few mortgage lenders charged a commission in advance. Most simply charged higher refinancing rates, rather than asking homeowners to pay extra at closure.
Refinancing fees in an unfavorable market raised refinancing rates by 0.125-0.25% for most borrowers.
As Mortgage Daily News explains that the real cost of the unfavorable market refinancing fees rose to “$ 1,500 on a $ 300,000 loan, or [a] 0.125-0.25% [increase] I know “.
From the outset, the fee was met with a barrage of criticism from both consumer groups and the mortgage industry.
Finally, FHFA announced its removal. The unfavorable market refinancing fee will no longer be charged on loans made to Fannie Mae or Freddie Mac after August 1st.
Since it usually takes a month or more from loan closing to “delivery”, this effectively means that the commission has already been charged for new refinancing loans. So borrowers don’t pay anymore.
Who will be affected by this change?
The unfavorable market refinancing fee applies only to “qualifying mortgages,” that is, those that meet Fannie Mae or Freddie Mac’s standards. Thus, the removal of the commission will affect only homeowners who have received this type of loan.
Most homeowners in the US have a proper mortgage even if they don’t know about it. Your mortgage may have been sold to Fannie Mae or Freddie Mac after closing.
To find out if you have a qualifying loan, you can use the following search tools:
If you have a government backed mortgage, including VA loans, FHA loans, and USDA loans, changes to this fee will not affect you.
In addition, homeowners with a Fannie Mae HomeReady loan, a Freddie Mac Home Possible loan, and a loan of less than $ 125,000 were exempted from commission. So the changes will not affect these borrowers either.
How much can refinancers save?
If you are looking to refinance an eligible mortgage, this policy change can go a long way.
Let’s say you have a loan balance of $ 300,000. If your mortgage lender charged an upfront refinancing commission for an unfavorable market, you would probably pay an extra $ 1,500 at the close of the deal. So removing this fee would mean substantial savings out of pocket.
However, most lenders did not charge a commission in advance. Instead, they set higher refinancing rates.
So how much can you save now that refinancing rates are likely to drop? Let’s take a look at an example.
Suppose a homeowner can get 0.25% lower rate through refinancing now that the unfavorable market commission has been withdrawn. This is what the math might look like:
|With a return commission for an unfavorable market||NO commission for refunds in an unfavorable market|
|Loan balance||USD 300,000||USD 300,000|
|Current mortgage rate *||4.0%||4.0%|
|Current monthly P&I payment||USD 1,530||USD 1,530|
|New interest rate *||3.25%||3.0%|
|New monthly P&I payment||USD 1320||USD 1,280|
|Interest saved over 30 years||USD 15,100||USD 30,000|
* All interest rates are for example only. Your own interest rate will be different.
In this example, the homeowner can save an extra $ 40 on their monthly refinancing payments now that the refinancing fee has been charged.
It may not seem like much. But 30 years later, the homeowner saved another $ 15,000 thanks to the lower rate.
As always, the longer you stay at home after refinancing, the more you will benefit from the lower refinancing rate.
Of course, you have to pay the final refinancing costs. And you reset your mortgage hours, which means you will borrow for a longer period and pay more interest in the long run.
But, if the savings are big enough, you might think this is a price worth paying.
You won’t know exactly how much you can save until you get refinancing quotes from multiple lenders.
Why give up refinancing fees in an unfavorable market?
The FHFA has justified the unfavorable market refinancing fee, arguing that it is necessary to protect Fannie Mae and Freddie Mac from the losses they could suffer from the pandemic. He feared that high unemployment and a recession would ruin many of their loans.
But it didn’t work out that way.
By April 2021, only about two percent of Fannie and Freddie’s single-family mortgages were still on hold, according to FHFA. So it was easy for the new administration to give up a fee that it never liked.
“Removing refinancing fees in an unfavorable market will help families take advantage of lower rates to save more money.” –Sandra L. Thompson, Acting Director of FHFA
Sandra L. Thompson, who was appointed acting director of FHFA in June 2021, the report said. statement:
“The COVID-19 pandemic has financially exacerbated America’s affordable housing crisis. Eliminating refinancing fees in an unfavorable market will help families take advantage of low rates to save more money. ”
She continued: “Today’s actions advance FHFA’s priority to support affordable housing while protecting the safety and reliability of businesses. [Fannie and Freddie]…“
Is refinancing worth it?
The traditional way decide if refinancing is worth it is to divide your closing costs (usually 2-5% of the loan amount) by your potential savings from the lower refinancing rate. You can then see how many months it will take you to recoup your investment and start generating “real” savings.
Most people would find this “break-even point” a surefire way to decide if refinancing makes sense.
But if it takes you several years to recover the cost, you may have to decide if the savings are worth saving.
Refinancing without closing costs
Many lenders offer refinancing without closing costs parameters. And there is nothing wrong with such proposals.
But you have to admit that these lenders are not doing charity work. You will almost always pay a higher refinancing rate so that the lender can recoup those costs over time … and perhaps more than recover them.
So if you don’t have enough money to close, be sure to check out these offers. Just keep in mind that there is no free lunch (or refinancing).
Refinancing rates are still incredibly low
For several months now, rating experts and observers (including this one) have been warning of an imminent hike in mortgage and refinancing rates. And we all start to look stupid. Because these rises did not happen.
When it was written (mid-July 2021), rates on 30-year fixed rate mortgages were at their lowest in five months.
In fact, rates were close to a record low in January of the same year, according to data Freddie Mac Archive…
But don’t think that this happy situation will necessarily last. There are indeed forces that should push mortgage and refinancing rates higher. And they can work at any moment.
There may be a limited window for refinancing without a reverse market commission. as well as at an ultra-low price. So if you’ve been considering refinancing, now is a great time to check your options.