Millions of homeowners have faced an ongoing dilemma over the past several years. As interest rates have fallen, the incentives favoring refinancing your mortgage have steadily risen. Yet because refinancing typically involves thousands of dollars in costs for everything from new appraisals and title insurance to legal fees, it's not a decision that you can afford to take lightly. And once done, you may find that it's way too expensive to do again if rates happen to fall further.
All that could change, though, in the near future. If a new proposal from the Consumer Financial Protection Bureau actually becomes a requirement, then refinancing could get a whole lot easier.
Under the proposed CFPB rule, mortgage lenders would have to offer an option under which homeowners wouldn't owe any fees. Under the fee-free option, homeowners or prospective buyers would be able cut existing up-front closing costs on mortgages substantially.
The idea behind the proposal is to make it simpler for people to understand the loans they're getting and to compare loan offers from different lenders. Under the current situation, mortgage borrowers have to consider not only the interest rate they're getting but also any up-front "points" and origination fees that banks charge. By leveling the playing field, borrowers would simply be able to look at the rate each bank offers and choose the lowest one.
The proposal still allows banks to offer lower interest rates in exchange for points or other fees. In some cases, taking such deals will give homeowners the best deal over the long run. Yet with so many mortgage loans getting closed out long before their full periods run, whether because people move or refinance at better rates, paying points for a lower rate makes less sense than it may have for past homeowners who moved around less.
Banks should celebrate
At first glance, you might think top mortgage lenders Wells Fargo
Consider: Fee-free mortgages already exist. Typically, what you have to do to get a fee-free mortgage is to accept a higher interest rate on your mortgage loan. Just as paying points earns you a lower rate, accepting a higher rate gives you a credit that you can apply toward closing costs. So under so-called "fee-free" mortgages, there might well still be fees involved. They'd just be subsidized by higher rates.
Moreover, reducing the barrier to refinancing would lead to a huge increase in refinancing activity. Think about it: Any time an interest rate moved down even slightly, homeowners would have an incentive to go ahead and pull the trigger on another refinancing. As long as banks were able to earn transaction-related income by selling those loans, they'd actually profit more from the new rules.
The same goes for other transaction-related companies. For instance, title insurance company Fidelity National
Yet the biggest winners would still be consumers. Given how many homebuyers didn't understand the terms of the loans they got during the housing boom, just about anything that makes loans easier to understand is a net positive. And if it helps goose the home financing market, so much the better.
Feeling at home
For now, the CFPB will go through its normal process of getting public comments both from banks and customers to weigh any concerns that either group has about the new proposal. Barring any controversy, however, the new rules could go into effect as early as January, bringing a welcome New Year's gift to many homeowners.
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