Refinancing your mortgage just got cheaper: Feds end pandemic-related refi fee

·5 min read

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Refinance rates have been a great deal all year — the highest rate of 2021, so far, was just 3.250%, which 30-year fixed rates last hit on March 23. Refinancing in 2021 has meant huge money-saving potential for thousands of homeowners.

But refinancing costs are about to drop even more. On Friday, July 16, the Federal Housing Finance Agency announced it will end its Adverse Market Refinance Fee effective Aug. 1, 2021.

Let’s look at how much this move could save homeowners still looking to refinance in 2021, and how you can make the most of the opportunity to save.

What was the Adverse Market Refinance Fee?

Facing significant anticipated pandemic-related losses, on Dec. 1, 2020, the FHFA began charging lenders a 0.5% fee for every refinanced mortgage it sold to Freddie Mac and Fannie Mae.

Lenders could pass on that 50-basis point fee to borrowers in the form of increased interest rates, higher closing costs, or a larger loan amount. The fee only applied to conforming loans of more than $125,000 from lenders who sell their loans to Freddie Mac and Fannie Mae. But if your refinance mortgage was subject to the fee, it cost you an extra $500 for every $100,000 you refinanced.

Why did the feds drop the fee?

The Adverse Market Refinance Fee was never meant to be permanent. It was intended to help shore up the finances of Fannie Mae and Freddie Mac, which are key to the overall health of the housing finance system. By buying mortgages from lenders, the government-backed entities help provide liquidity, stability, and affordability to the mortgage market, the FHFA says.

The FHFA says it ended the fee because the pandemic-related policies of Freddie Mac and Fannie Mae worked to reduce the financial impact of the global health crisis.

What does this mean for me if I want to refinance?

The fee ends Aug. 1, 2021 — although some lenders could stop charging it sooner. For example, Credible partner lenders cut the fee immediately following the FHFA’s announcement.

And the FHFA has been clear that it expects lenders to pass on this savings to consumers.

“FHFA’s expectation is that those lenders who were charging borrowers the fee will pass cost savings back to borrowers,” the agency said in its statement announcing the fee termination.

Coupled with historically low interest rates for mortgage refinances, the end of the fee should spell significant additional savings if you’re looking to refinance. For example, if you refinanced a $300,000 loan balance when the fee was in effect, you likely would have paid an additional $1,500 for the Adverse Market Refinance Fee.

How to get a good deal on a mortgage refinance

People typically refinance for one reason or several, including …

  • To get a lower interest rate

  • To lower their monthly mortgage payment

  • To shorten their repayment term

  • To withdraw equity

Whatever your reason for refinancing, some factors that affect your interest rate are out of your control. But others you’re able to influence. Here are some steps to help you find and secure the best mortgage refinance rate available to you.

Review your credit — and work on it, if needed

Credit scores play an important role in lender decisions, including what rate to offer you. Generally, people with higher credit scores and good credit histories are more likely to qualify for lower interest rates.

Check your credit reports from the three major credit bureaus for free at AnnualCreditReport.com. Look for, and correct, any mistakes. In the months leading up to your refinance application, be sure to pay all your bills on time and in full, and avoid taking out any other new credit.

Reduce your debt-to-income ratio

Debt-to-income ratio, or DTI, is a key factor in mortgage decisions. Lenders look at DTI to understand your ability to repay a loan. A high DTI could be a sign you’ll struggle to repay your mortgage. Generally, lenders like to see a DTI no higher than 45%, although you may be able to qualify with a higher DTI if you have ample cash reserves.

To improve your DTI, pay down existing debt and/or increase your income.

Understand your home equity

If you’re looking to do a cash-out refinance in order to make home improvements, it’s important to understand how much equity you have in your home. The calculation is fairly simple — subtract your mortgage balance from your home’s value. The difference is your equity.

Keep in mind that lenders typically only allow you to borrow up to 85% of your equity, although lender limits may vary. For example, if you have $100,000 of equity in your home, the maximum you could borrow against your equity would be $85,000.

Comparison shop for lenders and rates

When you’re borrowing a large amount, even a small difference in interest rate can add up to thousands of dollars over the life of a mortgage. Just as you comparison shop for other products, it’s important to compare lenders and rates when you’re looking for a refinance mortgage.

With Credible, you can request prequalified rates from multiple mortgage refinance lenders. And be sure to compare lender fees to get a better picture of a loan’s total cost.

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