Looking to refinance your mortgage? Prepare to pay a bit more than you expect

Historically low mortgage interest rates over the past several months have been a godsend to homeowners seeking to refinance and homebuyers alike.

But for many in the former camp, the window of opportunity to save the most money is coming to an end. That’s because the Federal Housing Finance Agency (FHFA) is starting to tack on a 0.5% fee to all refinances backed by Fannie Mae and Freddie Mac. For affected borrowers, that can add up to paying thousands more out of pocket.

“The FHFA announced in August that there would be an additional 50 basis point fee on all refinances of loans backed by Freddie Mac and Fannie Mae. The news came as a shock to both lenders and their borrower clients, as this fee was instituted with no warning,” explains Paul Buege, president and chief operating officer of Inlanta Mortgage in Pewaukee, Wisconsin.

Initially, the fee was set to go into effect on September 1, 2020. But following an outcry by the mortgage industry, it was postponed until December 1, 2020.

Brian Davis, the Baltimore-based director of education for SparkRental, says the FHFA believes the fee is justified.

“They implemented the fee as a way to recoup their expected $6 billion in losses from defaulting borrowers due to the ongoing pandemic,” he says.

The fee will be used to support ongoing action being taken to halt foreclosures and establish forbearance programs designed to provide homeowners breathing room on paying their mortgage if they have been impacted by the coronavirus, according to Jess Kennedy, co-founder and CCO of Providence, Rhode Island-headquartered Beeline.

The bad news? “The average borrower will pay around $1,400 for this additional fee — a substantial sum of money to hit borrowers with,” Davis says.

On a $250,000 refinance loan, expect to pay a whopping $1,250. The good news? “This fee only applies to refinance transactions above $125,000. So purchases and lower balance loans will not be impacted by the fee,” Kennedy says. “Also, certain refinance products are exempt, including Fannie Mae and Freddie Mac affordable products like Home Possible and HomeReady loans.”

Buege adds that some lenders will incur the fee directly to remain ratecompetitive, while others will pass the fee on to the consumer via a higher rate offering.

“Or, borrowers may opt to pay the additional cost all at once upfront to keep their interest rate lower. If so, the fee will amount to 0.5% of their loan amount and be a one-time charge,” she notes.

A good rule of thumb is to ponder refinancing if your current mortgage rateis50to100basis points higher than current rates.

“So, if your current mortgage rate is 4% or higher, refinancing is definitely something to consider, even with this additional fee,” Buege suggests. “Remember that interest rates are still at historic lows and rates are very attractive for most consumers.”

Don’t expect the FHFA to eliminate this fee any time soon, the experts caution.

“The problem with fees and taxes like this introduced during times of recession is that they don’t disappear when the economy returns to normal,” Davis says. “The government entities charging them simply roll them into their budgets moving forward, creating a cycle of higher fees and taxes that never corrects itself.”

Kennedy expects refinance activity to suffer after the fee goes into effect.

“There are no great options here, and homeowners looking to refinance will see rates that are higher to account for this fee in some way,” she says. “If rates creep up and the fee is added, refinance activity could slow down while people figure out if a refinance is good for them while this fee is in place.”