Adverse Market Fees Are Increasing Refinance Costs
Refinancing is the process of revising or replacing the current terms of a credit agreement. These revisions are typically made to make favorable changes to the payment schedule or interest rate of a loan. In 2020 interest rates are nearing all time lows. Many homeowners are currently looking at refinancing in order to lock in historically low interest rates. Interest rates are currently averaging below 3% and continuing to fall. However, recently announced adverse market fees for Fannie Mae and Freddie Mac loans will soon take effect. The adverse market fees will decrease the benefits of such low rates. These fees will apply to refinancing but not new home purchases. Here is what you need to know.
Federal Housing Finance Agency
The Federal Housing Finance Agency(FHFA) oversees all Fannie Mae and Freddie Mac loans. Fannie Mae and Freddie Mac are responsible for more than half of all home loans in the U.S. On August 12, 2020 FTFA announced upcoming adverse market fees. Originally those fees were supposed to begin September 1, 2020. However, an announcement was made soon after that postponed implementation of the adverse market fees until December 1, 2020. The postponement was given in order to give the industry time to prepare.
FHFA will exempt loans with a low balance from paying this adverse market fee. This includes all loans with balance below $125,000. Nearly half of these loans are held by low income borrowers. Exemption also extends to affordable refinance products, Home Ready, and Home Possible. However, FHFA says the adverse market fee is necessary in order to cover losses caused by the Covid-19 pandemic. Fannie Mae and Freddie Mac are expected to lose at least $6billion throughout the course of the pandemic. These losses come primarily from actions taken to protect renters and borrowers during the pandemic. They project $4billion in losses due to forbearance defaults alone. $1 billion is expected in foreclosure moratorium losses.
Adverse Market Fees
This is not the first time that FHFA has imposed an adverse market fee on lenders. We last saw adverse market fees implemented in 2007 during the financial crisis. Back then, the adverse market fee for Fannie Mae was at a rate of .25% on all mortgages. This time around the adverse market fees are a bit higher. A .5% charge will be added to all refinancing on loans that do not qualify for exemption. That amounts to $500 for every $100,000 borrowed. This is a fee applied to the lender. However, lenders are expected to pass these fees onto borrowers when adverse market fees are implemented in December.
The adverse market fees will likely be factored into the interest rates offered during refinancing. These fees will likely be covered by a rate increase between 0.125% and 0.25%. This mortgage rate increase is likely to slow the volume of homeowners looking to refinance. However, even with the added rates to cover adverse market fees most homeowners would still benefit from a refinance. Even after 0.25% is added to current record low rates, it is still a good rate. It is an interest rate that is likely to be a lower rate than what was available in years past. Last year, the average rate for 30-year fixed rate loan was 3.73%. This year, the average interest rate is 2.87% for that same loan. The difference between those two rates could potentially mean hundreds of dollars every month in savings. The amount you save by lowering your interest rate through refinance is dependent on the size of your loan. With larger loan principals you will save larger amounts with lower interest rates.
Bottom Line
If your credit is in good standing and you are considering refinancing your home loan, now is the time. Refinancing can take months to reach completion. Waiting too long to start the process could put your refinance past the December deadline. The addition of adverse market fees could cost you thousands. However, adverse market fees should not deter anyone from refinancing if they can benefit from it. Current low interest rates are still beneficial to the homeowner even if adverse market fees must be tacked on. Contact Peoples Choice Mortgage today. We can help you refinance your loan and take advantage of these record low interest rates.