Mortgage Refi Costs to Rise in September as Fannie Mae, Freddie Mac Add 0.5% Fee

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Refinance rates are at record lows, but costs are expected to rise in September as Fannie Mae and Freddie Mac impose new fees. Here's what you need to know.

With mortgage rates repeatedly hitting record lows, there's never been a better time for most homeowners to refinance. Beginning Sept. 1, however, a new 0.5% fee imposed by Fannie Mae and Freddie Mac mean consumers will pay more for refinance loans.

Fannie Mae and Freddie Mac operate under congressional charters, and are "government-sponsored entities" (GSEs). Their role is to increase liquidity in the mortgage market. To do this, they purchase loans from lenders and maintain them, or repackage them for sale to investors in the form of mortgage-backed securities. Because they purchase around half the loans lenders make, these two GSEs establish many of the basic guidelines governing mortgage lending.

Though Fannie Mae and Freddie Mac do not make loans directly to customers, the additional 0.5% fee will get passed along to consumers. Unfortunately, according to the Mortgage Bankers Association, this new fee could increase the average cost of a refinanced loan by $1,400.

Who is affected by the additional 0.5% fee?

Fannie Mae announced the new fee in a Lender Letter released Aug. 12, calling it an "adverse market refinance fee." The GSEs claim the fee is necessary due to market conditions caused by coronavirus.

The 0.5% cost will be assessed beginning Sept. 1, 2020, and will apply to:

  • Limited cash-out refinances
  • Cash-out refinances

It will also apply to HomeReady and high loan-to-value refinances made through special government programs, without regard to the fee cap that normally applies to these transactions.

However, it will not apply to construction-to-permanent loans with a single closing that are processed as refinance loans.

Why is this fee being imposed?

In its lender letter, Fannie Mae said the additional fees were necessary in light of "market and economic uncertainty." The agency indicated that current economic conditions have increased the risk of investing in mortgages and resulted in the GSE's incurring higher costs.

While coronavirus has indeed resulted in unprecedented uncertainty, the Mortgage Bankers Association has strongly denounced the additional charges, releasing a statement saying Fannie Mae's announcement is "bad for the nation's homeowners and the nascent economic recovery."

The decision to impose new fees is at odds with other government initiatives that are working to increase liquidity in the mortgage market and bolster the economy -- including the Federal Reserve's purchase of an estimated $40 billion in mortgage-backed securities per month.

What should homeowners do?

Although the new fee will not take effect until Sept. 1, it may be too late for most homebuyers to refinance their mortgages without being subject to it.

Mortgage technology firm Ellie Mae reports it took an average of 48 days to close on a refinance loan in June. With lenders swamped with new refinance requests due to record low rates, it's unlikely that those who haven't already begun the process would be able to secure a loan and close on it before the September deadline.

Borrowers with loans currently in the pipeline will be protected from the cost increase -- if they have locked in their loans. Those who haven't locked in a rate and who can't close by Sept. 1 will likely have to pay the added fees.

If you're considering a refinance, be sure to take these extra costs into account. With rates so low, refinancing may still be a financially sound choice -- but it may not provide quite the same savings it would have before this new fee was announced.

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