Refinancing just got cheaper
On July 16, 2021, the Federal Housing Finance Agency (FHFA) announced it was finally removing the Adverse Market Refinance Fee.
The additional fee, which was introduced last year, raised either interest rates or closing costs on all conforming refinance loans.
Removing the fee will make refinancing less costly for millions, with refinance rates or fees dropping as a direct result. And the good news is, those lower costs start now.
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What is the Adverse Market Refinance Fee?
In August 2020, the FHFA unveiled its proposal for a new Adverse Market Refinance Fee.
The fee, which applied to all conforming refinance loans, was equal to 0.50% of a borrower’s loan amount.
But few mortgage lenders charged the fee upfront. Most simply charged higher refinance rates, rather than asking homeowners to pay extra at closing.
The Adverse Market Refinance Fee increased refinance rates by 0.125-0.25% for most borrowers.
As Mortgage News Daily explains, the real cost of the Adverse Market Refinance Fee shook out to either “$1500 on a $300k loan, or [a] 0.125-0.25% [increase] in rate.”
From the start, the fee was met with a barrage of criticism from both consumer groups and the mortgage industry.
And, finally, FHFA has announced its removal. The Adverse Market Refinance Fee will no longer be charged on loans delivered to Fannie Mae or Freddie Mac after August 1.
Because it usually takes a month or more from loan closing to ‘delivery,’ that effectively means the fee has already been removed for new refinance loans. So borrowers are no longer paying it.
Who is affected by this change?
The Adverse Market Refinance Fee only applied to “conforming mortgages,” which are those that conform to Fannie Mae or Freddie Mac standards. So only homeowners with this type of loan will be impacted by the fee being removed.
Most U.S. homeowners have a conforming mortgage, even if they aren’t aware of it. Your home loan may have been sold to Fannie Mae or Freddie Mac after closing.
To find out whether you have a conforming loan, you can use these lookup tools:
If you have a government-backed mortgage — including VA loans, FHA loans, and USDA loans — the changes to this fee won’t impact you.
In addition, homeowners with Fannie Mae HomeReady loans, Freddie Mac Home Possible loans, and loan amounts below $125,000 were spared from the fee. So changes won’t impact these borrowers either.
How much could refinancers save?
If you wish to refinance to a conforming mortgage, this policy change could make a big difference.
Say you have a loan balance of $300,000. If your mortgage lender were to charge the Adverse Market Refinance Fee upfront, you would have likely paid an extra $1,500 at closing. So removing that fee would mean substantial savings out of pocket.
However, most lenders didn’t charge the fee upfront. They charged higher refinance rates instead.
So how much can you save now that refi rates are likely to fall? Let’s look at an example.
Assume a homeowner can get a 0.25% lower rate by refinancing now that the Adverse Market Fee has been removed. Here’s how the math might look:
WITH Adverse Market Refi FeeWITHOUT Adverse Market Refi FeeLoan Balance$300,000$300,000Existing Mortgage Rate*4.0%4.0%Current Monthly P&I Payment$1,530$1,530New Interest Rate*3.25%3.0%New Monthly P&I Payment$1,320$1,280Interest Saved Over 30 Years$15,100$30,000
*All interest rates are for sample purposes only. Your own interest rate will vary.
In this example, the homeowner could save an extra $40 on their monthly payments by refinancing now that the Refinance Fee has been removed.
That may not sound like much. But after 30 years, the homeowner has saved an extra $15,000 thanks to that lower rate.
As always, the longer you stay in your home after refinancing, the greater benefit you’ll reap from having a lower refinance rate.
Of course, you have to pay closing costs on your refinance. And you’ll be resetting the clock on your mortgage, meaning you’ll borrow for longer and pay more interest in the long term.
But, if the savings are big enough, you may well think those are prices worth paying.
You won’t know precisely how much you can save until you get refinance quotes from multiple lenders.
Why scrap the Adverse Market Refinance Fee?
The FHFA justified the Adverse Market Refinance Fee by claiming it was necessary to protect Fannie Mae and Freddie Mac from losses they might incur as a result of the pandemic. It feared that high unemployment and a recession would turn many of their loans bad.
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 in forbearance, according to the FHFA’s own figures. So it was a no-brainer for the new administration to scrap the fee, which it had never liked.
“Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money.” -Sandra L. Thompson, Acting FHFA Director
Sandra L. Thompson, who was appointed FHFA acting director in June 2021, said in a statement:
“The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the Adverse Market Refinance Fee will help families take advantage of the low-rate environment to save more money.”
She continued, “Today’s action furthers FHFA’s priority of supporting affordable housing while simultaneously protecting the safety and soundness of the Enterprises [Fannie and Freddie].”
Is refinancing worth it?
The traditional way to decide whether a refinance is worthwhile is to divide your closing costs (typically 2-5% of the loan amount) by your potential savings from the lower refinance rate. You can then see how many months it will take you to recoup your costs and start making ‘real’ savings.
Most people would regard this ‘break-even point’ as a sure-fire way to decide whether refinancing makes sense.
But, if it takes you several years to recoup your costs, you may have to make a judgment over whether your savings are worthwhile.
Quite a few lenders offer no-closing-cost refinance options. And there’s nothing wrong with such offers.
But you need to recognize that those lenders aren’t being charitable. You’ll almost always pay a higher refinance rate so that the lender can recoup those costs over time… and maybe more than recoup them.
So, if you’re short of cash for closing, by all means, check out these offers. Just bear in mind that there’s no such thing as a free lunch (or refinance).
Refinance rates are still incredibly low
For months now, rate experts and observers (including this one) have been warning about an imminent rise in mortgage and refinance rates. And we’re all starting to look silly. Because those rises haven’t materialized.
When this 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 the all-time low seen in January that year, according to Freddie Mac’s archives.
But don’t think that this happy situation will necessarily last. There really are forces that should be pushing mortgage and refinance rates higher. And those could kick in at any moment.
There may be a limited window in which to refinance without the Adverse Market Refi Fee and at an ultra-low rate. So if you’ve been considering a refinance, now is a great time to check out your options.