As rates on home loans have slumped to all-time lows this year, hordes of homeowners have cut their monthly mortgage payments by refinancing. But that process is about to get more expensive.
The two huge government-sponsored mortgage companies that buy or back most U.S. home loans say they'll need to start charging an "adverse market refinance fee" equal to 0.5% of the loan amount, beginning Sept. 1.
Mortgage lenders are livid and say the charge will cost the average borrower an extra $1,400. That's enough to make some people think twice about whether a refi is worth it.
But don't rule out getting a new loan, because you might easily offset the new fee.
Mortgage giants blame the fee on COVID-19 'uncertainty'
The fee is due to "market and economic uncertainty resulting in higher risk and costs," says Fannie Mae, one of the two mortgage giants announcing the new fee.
The other, Freddie Mac, more specifically refers to "COVID-19 related economic and market uncertainty" in its notice.
Ironically, it's the pandemic that has made refinancing so appealing, by driving down mortgage rates. The outbreak forced the Federal Reserve to take action to push interest rates lower, as part of a campaign to heave the economy out of its coronavirus recession.
Virus fears also have led investors to pile into Treasury bonds in search of safety, and that trend has lowered the interest, or yields, on Treasuries. Mortgage rates tend to move in sync with bond yields.
The downward pressure on interest rates has resulted in 30-year mortgage rates that are averaging less than 3% for the first time ever, and at least one lender has rolled out a 30-year loan with a rate below 2%.
But the new 0.5% refinance charge will effectively "raise interest rates on families trying to make ends meet in these challenging times," says Bob Broeksmit, president and CEO of the Mortgage Bankers Association.
"The recent refinance activity has not only helped homeowners lower their monthly payments, but it is also reducing risk to (Fannie Mae and Freddie Mac) and taxpayers," Broeksmit says. He's urging federal regulators to stop the fee.
How refinancers can make up the fee
Before the twin notices from Fannie and Freddie, the mortgage data firm Black Knight estimated that 15.6 million U.S. homeowners who still hadn't refinanced could save an average $289 a month by taking out a new loan.
Let's say you're in that group and have been wanting to refi, but now you're going to have to fork over another upfront fee that'll amount to $1,000 on a $200,000 mortgage balance. How do you swallow that?
The best way is to cut some of your other refinance and related costs — through good old-fashioned shopping around. It may sound simple and almost obvious, but many people don't do it.
First, shop around diligently for your mortgage rate. Research from Freddie Mac has found that nearly half of borrowers stop at the very first rate quote they receive — and overpay as a result.
Getting a second quote results in average savings of $1,500 over the life of the loan. And if you gather quotes from five lenders, you'll save around $3,000, on average, according to the study.
Then, comparison shop for your closing costs. These mortgage fees typically total more than $5,000, but you can lower the price tag by looking around and finding cheaper providers of requirements like inspections and appraisals.
Your lender may even be persuaded not to charge you an appraisal fee, if your property was appraised fairly recently. And if you stick with the same title insurance company that handled your original mortgage, you can save up to 40% off title fees.
Finally, shop around for other insurance policies. When your homeowners insurance comes up for renewal, check rates from several insurers, to make sure you're getting the best price for your coverage.
And if you buy life insurance (which a homeowner needs, to protect loved ones from the financial burden of a mortgage — just in case), comparison shop for that policy, too. Go online and review coverage and rate quotes from multiple insurance companies to find your most affordable option.
Smart shopping takes time but it can easily reduce your costs as a homeowner, so you can refinance and still come out far ahead — even with that new fee.