A new refinance fee is now in effect, potentially increasing the interest rate homeowners are quoted if they can’t convince the lender to waive the fee.
The enactment comes as the rate on the 30-year fixed mortgage hit a new low of 2.71%, marking the 14th record this year.
The Federal Housing Finance Agency, which supervises Freddie Mac and Fannie Mae that back millions of mortgages, imposed a 0.5% fee on lenders for new refinanced mortgages starting December 1. Loans below $125,000 are exempt from the fee altogether.
“Most applicants will not see the fee as a cost or points charged to them,” said Tony Grech, senior mortgage loan officer at Luxury Mortgage Corp, a mortgage lender. “The refinance fee will be reflected in the interest rate rather than the fees. To the average borrower, this equals .125% to .25% higher in rate.”
Why is there a fee?
Under the CARES Act passed in March, homeowners struggling from a coronavirus-related hardship could postpone their mortgage payments for 180 days and receive another 180 days of forbearance, depending on their need.
Fannie Mae and Freddie Mac, the government agencies backing those home loans incurred more than $6 billion in losses related to the forbearance plans. To compensate for this loss, the agencies are tagging the 0.5% fee onto new refinance loans.
“In my opinion this is nothing more than a money grab,” said Scott Sheldon, branch manager at New American Funding, a mortgage lender. “And the government was very methodical in adding this fee.”
Mortgage data and analytics firm, Black Knight reported that, as of December 1, 2.76 million homeowners remain in active forbearance plans, representing $561 billion in unpaid principal. Still, this is a 5.3% decline from the previous week.
What can borrowers do?
Borrowers should be upfront with their lenders about the fee and ask if it can be lowered or waived altogether.
“On the flip side, lots of lenders —us included — on a case-by-case basis, have the ability to waive that fee anyway,” Sheldon said. “It’s going to be contingent on the lender whether to charge or eat the fee.”
Borrowers can — and should — shop around to find the best deal along with a lender that is willing to absorb the fee.
Despite the new fee, homeowners likely won’t be discouraged from refinancing — given the historically low mortgage rates — and experts expect the refinance boom to continue into 2021.
“We have massive demand for refinancing at the moment,” said Sheldon, whose mortgage firm in Santa Rosa, California, experienced a 74% increase in refinance volume from last year. “This fee is not deterring new mortgage loan requests and the government knows it, which is why they can collect this fee.”