The New Fed Refinancing Fee Is Coming Dec. 1st; Should I Still Refi?
In September of 2020, the Federal Housing Finance Agency (FHFA) was supposed to implement a new “Adverse Market Refinance Fee”. This fee will now be implemented on December 1st, 2020. This fee is being implemented to recover projected Fannie Mae and Freddy Mac COVID-19 losses of 6 billion from the protection of renters and borrowers during the pandemic. Many people are now reconsidering their refinance because of this new fee. There is good news though that makes the refinance outlook look positive for potential refinancers.
The good news is two-fold. One, the fee is not absorbently high at .5 percent of the loan amount. Two, the fee does not apply to low balance refinances below $125,000. In the grand scheme of the market, this extra fee does not mean that a refinance is a bad option for some homeowners for a few reasons.
Let’s take a look at a few numbers. For simplicity, we are using a home purchased at $350,000 with 20% down using a 30-year mortgage. For a 30-year mortgage with these parameters, the interest paid on each loan payment is more than the amount that goes towards principal until after year 8 of paying the mortgage. The principal amount of each payment goes towards the amount owed on your home once the down payment is factored in. The longer you take to pay down the loan, the more interest is paid. For many mortgage products, the interest is frontloaded or comes at the beginning of the loan. Knowing these loan parameters and terms, at 4.25%, the estimated interest paid over the life of the loan, if it takes 30 years to pay off, is $215,900. The monthly payment using these numbers is estimated at $1650. If you could refinance down to 3.25% using the same terms, you would save an estimated $57,139 in interest paid if the loan takes 30 years to pay off. The monthly payment is estimated to be $159 less than the previously estimated payment. That equates to a massive amount of potential interest savings over the life of the loan!
For the sake of looking at a few other options, a .25 percent interest rate difference can make an enormous difference over the life of your loan. Using the same loan parameters above, the difference in interest paid between a 4 percent and a 4.25 percent interest rate over 30 years is $14,500! A 15-year loan at 3.25% and 20% down saves the borrower an estimated $84,700 in interest paid over the loan’s life compared to the same loan parameters and a 30-year term. The payment is estimated at $749 more per month than the 30-year term. While being able to afford this payment difference may not be an option for some, it is still important to weigh all of your options when looking at a refinance. Saving so much money over the life of your loan and paying your home off in half of the time can have considerable financial benefits.
So, what do the above figures mean for those who are looking to refinance? At a .5 percent refinance fee increase, that equates to an estimated fee increase of $1400 using the loan amount numbers from above. While $1400 is a lot of money, the cost of not refinancing could be much greater, depending on your situation. The average cost of fees for a mortgage loan according to Bankrate, is 3.5 percent. For a loan amount used in this scenario, the fees being 4 percent of the loan amount would be estimated at $11,200, including the FHFA additional fee.
There are always scenarios where a refinance does not make sense. In today’s mortgage climate, a refinance can benefit many. I would enjoy the opportunity to take a look at your situation and see what makes the most sense for you. The worst thing to learn from a consultation is to know that you are in an ideal situation. There is never a better way to make your money grow than finding ways to save it. Please give me a call at 916-300-1450 if you would like to know if a refinance makes sense for you.
This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice.”
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