It Just Got Cheaper to Refinance a Mortgage

A costly refinance fee is disappearing, making it less expensive to get a new home loan.

Refinancing a mortgage is a good way to lower your monthly payments and save money on interest throughout the life of your loan. And now, it may be even more cost effective for you to swap your existing mortgage for a new one.

The adverse market fee is going away

In December of 2020, Fannie Mae and Freddie Mac (the government-sponsored entities that buy mortgages) implemented a 0.50% fee on all mortgage refinances with loan amounts of $125,000 or more. That fee was dubbed the "Adverse Market Refinance Fee," and it came at a time when things were a lot worse with regard to both the pandemic and the broad economy.

That 0.50% was a fee that Fannie Mae and Freddie Mac were charging lenders -- they weren't charging consumers directly. However, refinance lenders were largely passing that fee on to their customers to not have to absorb it themselves and eat into their profits.

Why is the fee disappearing?

When the economic crisis really came to a head, around 5% of borrowers with mortgages backed by Fannie Mae or Freddie Mac had their loans in forbearance because they were unable to keep up with their payments. Now, the share of Fannie and Freddie mortgages in forbearance is closer to 2%.

Not only that, but the U.S. economy is in a much stronger place now than it was back when Fannie Mae and Freddie Mac made the decision to implement that fee. As such, the risks of lending are lower.

It's for these reasons that eliminating the fee at this point makes sense. It's easy to make the argument that we're no longer dealing with adverse market conditions.

Should you refinance your mortgage?

Right now, refinance rates are extremely competitive, historically speaking, so it's a good time to get a new home loan if you're able to qualify for a low rate on one. Whether you're able to do that, however, will hinge largely on your credit score.

Generally, a credit score in the mid-to-upper-700s will put you in a solid position to snag the best refinance rates out there. If your score needs work, it could pay to boost it before applying for a new home loan.

Of course, if you have a low interest rate on your mortgage already, then refinancing may not make sense. As a general rule, you should aim to lower your home loan's interest rate by about 1% when you refinance. If you're unable to do that, you may want to stick with your existing loan to avoid having to pay what could be hefty closing costs on your new mortgage.

And speaking of closing costs, you'll need to make sure you intend to stay in your home long enough to make up for those fees. Refinancing your mortgage may, for example, lower your monthly payments by $200. But if you need to spend $5,000 on closing costs up front, it will take you 25 months to break even, and only from that point onward will you actually start enjoying savings.

If you don't plan to move for a number of years, then refinancing could make sense. But if you're gearing up to relocate in a year or two, then refinancing may not be a smart move.

If you are interested in refinancing, be sure to shop around with different lenders to see what rates they offer you. The good news is that you should save money by virtue of not having that 0.5% adverse market fee to contend with. But it still pays to compare offers to ensure that you really walk away with the best deal.