Refinance sooner rather than later to dodge the new adverse market refinance fee.

By Lauren Phillips
September 23, 2020

If you’re wondering when (or even if) you should refinance your mortgage, there are a number of things you should consider, including one new factor: the new adverse market refinance fee from the Federal Housing Finance Agency.

The Federal Housing Finance Agency (FHFA) regulates Fannie Mae, Freddie Mac, and the 11 Federal Home Loan Banks, which together provide more than $6.6 trillion for U.S. mortgage markets and financial institutions. Fannie Mae and Freddie Mac purchase about 70 percent of all home loans from lenders, so any changes to how these government-sponsored enterprises (GSEs) function will affect the majority of mortgage holders.

In August, the FHFA announced the adverse market refinance fee, which would add 0.5 percent to the total loan amount for all refinances, according to Forbes. This fee was set to go into effect September 1, 2020, but in late August, the implementation date was moved to December 1, 2020, according to a release from the FHFA.

What does this fee mean for people wanting to refinance their mortgage? Essentially, it makes refinancing more expensive.

Adding 0.5 percent to the total loan amount can add hundreds or thousands of dollars to the cost of refinancing, which already includes closing costs and other fees. If you have a $300,000 mortgage, have paid off $100,000, and want to refinance the remaining balance of $200,000 at a lower interest rate with a lender that sells to Fannie Mae or Freddie Mac, you’d have to pay a $1,000 fee on top of other closing costs and fees.

Refinancing your mortgage when interest rates are low—currently, rates are at near-record lows with the economic crisis caused by the coronavirus pandemic—can put you on the path to figuring out how to pay off your mortgage early by shortening the term length of your mortgage or help you save money by lowering your monthly payments. When you refinance your mortgage, you essentially take out a new loan—ideally with a lower interest rate—to repay the outstanding balance on your original mortgage. Your mortgage payments then go toward the new loan.

The key to savvy refinancing is to make sure your new monthly payment—or the amount you’d save on interest by shortening the length of your loan—is enough to balance out the cost of refinancing. Now, with the new FHFA adverse market refinance fee, you need to do a little extra calculating to make sure refinancing is the right decision for you.

If you’ve determined that now is the right time for you to refinance to take advantage of lower interest rates, start the process now, well before the adverse market refinance fee kicks in on December 1; that way, you can avoid paying an extra chunk of cash for your refinance. If, for whatever reason, you can’t refinance before December 1, there are a number of exclusions from the new fee.

First, if you have a loan balance of less than $125,000 for your refinance—either because you’ve paid down your balance to below that amount or because your mortgage loan was around that amount to begin with—you are exempt from the fee. The FHFA says nearly half of those with loan balances below that point are lower-income borrowers, so this exemption is designed to help keep refinancing accessible. The adverse market refinance fee will also not be applied to HomeReady and HomePossible loans, which are government-backed loans designed to help low-income borrowers.

This new FHFA refinance fee is designed to help Fannie Mae and Freddie Mac recover from COVID-19 losses, which are projected to be around $6 billion. With many people still experiencing layoffs or furloughs or income loss, and unemployment still very high, it’s a challenging time to be instituting a new fee. Unless your financial situation is very secure or you strongly suspect mortgage rates to fall even further, now—before the December 1 start-date for this new fee—is the time to refinance if you were already considering going through the process.