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If you're thinking of refinancing your mortgage, you should know that refinance rates are extremely competitive right now. Though you'll generally pay a higher rate on a refinance than on a new purchase mortgage, you could reap substantial savings by swapping your existing home loan for a new one.
There's just one catch. Beginning Dec. 1, there will be a 0.5% fee tacked onto all mortgage refinances of $125,000 or more. It's called the Adverse Market Fee, and it was originally slated to kick in on Sept. 1. However, since the fee was met with pushback from the housing industry, it got moved to Dec. 1.
If you haven't applied to refinance your mortgage and are thinking of doing so, you should know that it's probably too late to avoid that fee, at least from a timing perspective. It often takes 30 days or more to close on a mortgage, which means you're probably going to face that fee if you're only just starting the process now. But while that fee may be both annoying and costly, you might still come out ahead if you move forward with a refinance.
There's still savings to be reaped
Paying an extra 0.5% on your mortgage refinance may not be ideal. But you could still benefit financially, even if you get stuck with it.
Imagine you're refinancing a $200,000 loan. The new fee means you're looking at paying an extra $1,000 off the bat. But what if you're able to lower your monthly mortgage payment by $200 by refinancing? That means that in five months, you'll break even, then enjoy paying $200 less per month from that point forward.
Of course, you'll also need to break even when you factor in your loan's closing costs. Those vary by lender, and typically equal 2% to 5% of your mortgage amount. Let's say you get stuck with $6,000 in closing costs on your $200,000 mortgage plus that extra $1,000 refinancing fee, bringing your costs to $7,000. That means it'll take you 35 months to break even. If you have no plans to move in the next five years, or you think you're in your forever home, then refinancing still makes sense.
You may not have to pay that fee
Keep in mind that if your loan amount is small enough, this 0.5% fee may not apply to you -- it's only tacked onto loans of $125,000 or more. Even if your loan balance is a bit higher than that, if you can pay it down to under $125,000, you'll avoid that fee. In other words, if you owe your lender $130,000 but can pay $5,001 into your mortgage before taking out the new refinance loan, the fee won't be an issue.
Even if you do get stuck with that fee, refinancing your mortgage could still make a lot of sense financially. Just be sure to shop around with lenders so you're more likely to come away with the most competitive rate.