Your Refinance Is Getting More Expensive. Here’s Why

Image to accompany story about the cost of refinancing. Getty Images
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The mortgage refinance boom of 2020 is real. 

Refinance applications are up 47% over the same time last year. It’s been a trend since March, when mortgage rates dropped dramatically in response to the pandemic hitting the U.S.

But there are signs the refinance party could be slowing down.

Rates have crept up recently from their record lows. And a surprise new fee attached to most mortgage refinance loans is set to raise costs further, prompting some housing industry and consumer advocacies to call foul.

“It’s nothing more than a money grab,” says Greg McBride, chief financial analyst at Bankrate. 

The new .5% Adverse Market Refinance Fee, announced by Fannie Mae and Freddie Mac recently, will take effect on Dec. 1, 2020. The fee was originally to take effect Sept. 1, before the Federal Housing Finance Agency announced it would be moved back. It’s being introduced ostensibly because of the increased risk of borrowers defaulting on their mortgage, and will be paid by the lender, not the consumer. 

Still, McBride says this extra fee will be passed on in some form to homeowners who refinance. “Half a percentage point of a loan, that is not just some small nickel or dime charge that a lender could easily swallow without passing it on to the borrower,” McBride says. 

There is opposition to the new fee within the lending and housing industry, and consumer advocacy groups have concerns with how it will affect borrowers, especially low and middle income homeowners who have less flexibility to deal with higher interest rates. The Trump administration came out against the fee as well. “It appears to only help Fannie and Freddie and not the American consumer,” a senior White House official said in a statement to the Wall Street Journal, after the fee was originally announced.

Along with moving back the date the fee will take effect, the Federal Housing Finance Agency also announced changes that would exempt certain loans and mortgage offerings for lower-income buyers.

What This Means for Borrowers

This fee only applies to refinancing what are known as conforming loans with balances over $125,000. Conforming loans meet the lending guidelines set by the Federal Housing Finance Agency, Fannie Mae, and Freddie Mac. If you’re refinancing a jumbo loan or a government-backed mortgage, like a VA loan or a FHA loan, this extra fee won’t apply.

Fannie Mae HomeReady and Freddie Mac Home Possible, which are mortgage programs for lower-income homebuyers, are also exempt from the fee.

But for the majority of refinance loans, the bottom line is your refinance just got more expensive and there is little you can do about it. 

The Mortgage Bankers Association estimates this 0.5% fee will increase the cost of an average refinance by $1,400 for lenders. McBride thinks that may underestimate the cost for the borrower. Rather than tacking on the extra cost as an explicit fee, he predicts lenders will increase rates by one eighth to a quarter of a percentage point. “Over the life of the loan, that’s going to add up to a lot more,” McBride said.

According to a 2019 Experian report, the average homeowner in the U.S. owes around $200,000 on their mortgage. A homeowner looking to refinance that amount with the 0.25% rate increase McBride foresees on a 30-year loan could pay an extra $10,000 in interest over the loan’s term. Even on a shorter 15-year refinance an average homeowner would get saddled with around $4,000 in extra interest.

The lender will pay this new fee on any refinanced mortgage sold to Fannie Mae or Freddie Mac on or after Dec. 1. If you’ve already locked your interest rate, you’re protected from any impacts this fee could have on your refinancing costs. But if your rate isn’t locked, the lender can pass on the extra cost through a rate increase.

If your rate is locked, pay attention to when the lock expires. If there are delays in closing, and the lock ends, you could be stuck paying a higher rate. “If your lock period expires, the lender’s not going to extend that lock period knowing that they’re eating this fee,” McBride said. 

Even with the increased cost of refinancing it could still be a good move for you. You may not save as much as you would have, but the potential is still there to shed hundreds off your monthly payment or shorten your mortgage by years. And using a refinance to switch from an adjustable-rate to a fixed-rate mortgage can be a great move because, even with the new fee, rates are historically low.

It’s always a good idea to shop around for the best offer, and to do the math before proceeding. With higher rates or fees it increases the amount of time you’ll need to keep your home in order to recoup the refinance closing costs. So if you’re not planning on staying in your home long term, refinancing now may not make sense.