Would Refinancing still make sense?

Refinancing a mortgage means paying off an existing loan and replacing it with a new one. 

One could refinance for different reasons like either to take advantage of lower interest rate, or to shorten the term of their mortgage, or to convert from ARM to fixed-rate mortgage and vice versa, or also to tap into home equity to raise finance for emergency funds.

Some homeowners are wondering if now is still a good time to refinance, with the new mortgage refinance fee set to take effect on Dec. 1. Let us know about the fees and how it may impact your transaction.

Initially, the FHFA – the U.S. regulatory agency that oversees the secondary mortgage market, announced that it would begin imposing a 0.5% fee on mortgage refinances starting on September 1. 

However, after strong pushback from the housing industry, that date was moved to December 1.

In addition to delaying the 0.5 % charge, the FHFA said Fannie and Freddie will exempt loans of less than $125,000, nearly half of which is comprised of lower-income borrowers at or below 80 % of area median income.

“The fee is necessary to cover projected COVID-19 losses of at least $6 billion at the Enterprises.” 

The FHFA explained in a news release, “specifically, the actions taken by the Enterprises during the pandemic to protect renters and borrowers are conservatively projected to cost the Enterprises at least $6 billion and could be higher depending on the path of the economic recovery.”

While December is still several weeks away, Wayne Lacy, branch manager with Cherry Creek Mortgage in Okemos, says consumers may start seeing the extra fee now, because though the fee will be charged directly to lenders, who then, most likely, will pass it on to customers.

Lacy said, “when we close a loan at the lender level, the money gets dispersed and then we bundle the loan with similar products and sell it on the secondary market. 

That process takes anywhere from 30-40 days, sometimes longer, so loans that are closing today will be delivered close to that December 1 date, possibly after. 

Because the fee is due upon the delivery date, lenders are starting to build it into their pricing now.”

The borrowers may be charged through increased closing costs, a slightly higher interest rate, or it may be added to the loan amount by the lender. 

To put it into perspective, on a $300,000 loan, the fee will add $1,500 in costs.

With the mortgage rates at all-time low, the average interest rate on a 30-year fixed-rate mortgage was 2.86% as of early September, which was the lowest level in almost 50 years.

Lacy said, “In this low-rate environment, I think refinancing can be advantageous for many homeowners, despite the added fee. But just like with any financial decision, a thorough cost/benefit analysis must be done. 

I suggest consumers sit down with a lender to crunch the numbers. This will give you a clear picture of how much you can save and whether refinancing is the best option for you.”

The news of a hike in costs has given some borrowers a pause, after all, the goal of refinancing is to save money, not spend more. 

But Lacy says if a refinance made sense for you pre-fee, it will likely still make sense post-fee.