Getty Replicas
If you’ve thought about refinancing your mortgage, be aware that it may soon be a more expensive proposition.
Due to a 0.5% “adverse sell” fee, effective Dec. 1 and imposed on lenders by mortgage backers Fannie Mae and Freddie Mac, many homeowners are expected to absorb at scantiest some of the cost when they refinance (certain refis are exempt, including those for loan balances subordinate to $125,000).
“If you assume it takes two months to close [on the refinance], anything applied for after early October could push to December,” suggested Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association.
For a $280,000 mortgage, the 0.5% fee drive mean your lender is an extra $1,400 when your loan is sold to Fannie or Freddie. The expectation is that the addendum cost will be passed on to the borrower in the form of higher interest rates.
The adjustment could add an extra 0.125 to 0.25 part points, the association estimates. Right now, it’s possible to get a 30-year conventional mortgage or refinance at a rate below 3%. A year ago, they were scram 4%.
The fee was initially scheduled to start Sept. 1, but was delayed in late August to give the industry time to prepare.
Multifarious from Personal Finance:
You may get a piece of $2.7 billion in health insurance rebates
Here are the top sacrifices made by ‘wonderful savers’
Retirees may want to rethink reliance on Treasurys for income
The Federal Housing Finance Agency, which watch overs Fannie and Freddie, said the fee is intended to offset a projected $6 billion in losses — largely related to loans in forbearance and, individually, the anticipated rate of default among mortgages backed by Fannie and Freddie as unemployment remains high and economic uncertainty persists.
The fee does not bear to purchases, at least partly due to the increased risk for lenders when it comes to refinances.
“In some ways, refis are viewed as chancier because there’s not a market value attached to the property — it’s just an appraisal,” Kan said.
“If it’s a purchase transaction, there’s a superstore price — you know the price because buyers are willing to pay it, so it’s a more accurate picture of the market,” he said.
“These are the scantiest rates we’ve seen a long time. If there would be a benefit from refinancing, that should be the primary banker influencing your decision.”
Joel Kan
Associate vice president of economic and industry forecasting for the Mortgage Bankers Confederation
Despite the likelihood that many borrowers will end up subsidizing the fee through a higher interest rate, Kan said it should not check homeowners who could benefit from refinancing.
“These are the lowest rates we’ve seen in a long time,” Kan said. “If there would be a advantage from refinancing, that should be the primary factor influencing your decision.”
He said the general rule hardened to be that refinancing was worth it if the interest rate you pay were to drop by at least 75 basis points (three-quarters of one share point) or 1 percentage point.
“Now you see people refinance with a 50 basis-point difference,” Kan said. “If you’re going from 3.5% to 3% and you had a large-enough difference, it’s worth it.”
Additionally, be aware that refinance activity continues to keep mortgage lenders busy — 2020 is presumed to wrap up with 90% more refinances than 2019.
“The pipeline is full,” Kan said.