You’ve likely seen the news: Mortgage rates are at historic lows. That bright spot means you can take advantage of interest rate changes to refinance your home loan. Refinancing could lower your monthly payments, save you money on your loan in the long run, or both. But, if you know the basics of a mortgage refi, you know that refinancing isn’t necessarily cost-free.
And recently, you may have heard of a new fee that’s coming to the lending market: the Fannie Mae and Freddie Mac “adverse market” fee. So, let’s take a look at what this new cost could entail, and the other fees and closing costs you should be aware of when refinancing.
The “adverse market” fee will initially affect lenders, not borrowers.
The nation’s largest federally-backed entities that buy mortgages from lenders, Fannie Mae and Freddie Mac, are looking to cover pandemic-related losses (like foreclosures and defaults) with a new fee on mortgage refinance loans. This 0.5% fee is on refinanced loans and will go into effect on December 1, 2020.
Banks could pass at least part of the cost of the new fee to borrowers in the form of slightly higher interest rates on mortgage refinances. In fact, some lenders have already begun pricing their mortgages higher to account for the extra charge. However, it’s important to note this will not affect jumbo loans, purchase loans, or loans with an original principal amount less than or equal to $125,000. It will only apply to conforming refinance loans sold to Fannie Mae or Freddie Mac, both of which are overseen by the Federal Housing Finance Administration (FHFA).
While spurred by current economic conditions, there is no set end date for the adverse market fee, so it will likely be a factor to consider when refinancing for the foreseeable future.
The “adverse market” fee aside, when all is said and done, refinance fees can add up to around 3 to 6% of your outstanding principal.
Not all lenders will charge every fee, but it’s a good idea to know which common fees could potentially add to your refinancing costs, so you can better compare lenders.
Common Refinancing Fees
Let’s take a look at some of the more common refinancing fees you might come across during the process:
Common Refinancing Fees at a Glance
|Origination Fee||A standard fee for most lenders that covers the cost of preparing your loan documents and more. It may add up to 1% of your total loan.|
|Appraisal Fee||A common fee, usually around $450–$650, that appraisers charge to assess the worth of your property.|
|Discount Points||Prepaying discount or mortgage points is completely optional and can lower your interest rate. Each point is 1% of the loan amount.|
Most, but not all, lenders charge origination fees. In short, origination fees cover the cost of loan processing and can sometimes be a flat fee. Some lenders may also charge application fees, processing fees, document preparation fees, or underwriting fees. Whatever the wording, these charges cover the cost of preparing your loan documents, checking your credit history, assessing your loan application, and so on.
The total for these fees can add up to 1.0% of your total loan amount or more, and if you prepay (meaning, before you close) any of these fees, you may not get all of it back if your loan is denied. Be sure to take these charges into account as you research your options.
Be aware that lenders can charge mortgage points (more on these later) for their own profits, without lowering your interest rate, so read your Loan Estimate carefully.
Keep in mind these fees are direct revenue to the lender, and they will vary from one lender to the next. Some lenders may offset lower fees with higher rates, so it’s a good idea to look at the annual percentage rate (APR) when comparing loans.
An appraisal helps determine the valuation of your property, so you and the lender know how much you can borrow. Appraisal fees are a common cost when refinancing (or purchasing, for that matter), as your lender needs to make sure your home value is proportional to the amount you’re borrowing based on the loan-to-value (LTV) ratio. As part of that process, your lender will hire a third-party appraiser to conduct a home appraisal on the property. This is usually done through an Appraisal Management Company (AMC), which manages the appraisal process, including assigning an appraiser, ensuring the appraisal report meets certain standards, and assisting with any issues that arise.
The appraisal fee usually amounts to around $450 to $650 (it varies by lender) and might be included in the application fee. Federal law and guidelines established by Fannie Mae and Freddie Mac prohibit the appraiser from having an interest in the property, and to prevent appraisal fraud, you can’t select your own appraiser as a borrower. If you’ve recently had your home appraised, some lenders may waive this requirement, but that’s only a good idea if you’re sure your home’s value hasn’t increased since then.
Your mortgage lender may also require various other inspections to check for things like pests, adequate water supply, or structural integrity. The costs for these types of additional inspections usually run a few hundred dollars, and you can usually shop around to get the best price for these.
Discount points, or mortgage points, are interest payments based on the total amount of your loan and can help lower the long-term interest rate on your mortgage loan. These are optional fees, but you can prepay points to lower your mortgage’s interest rate. Each point is 1% of the mortgage amount and can lower your long-term rate by as much as 0.25%. Conversely, lenders may also allow you to take a higher interest rate in exchange for cash (or lender credits) to offset some of the upfront costs of refinancing.
If you don’t plan on selling anytime soon, buying points as part of your refi could be a smart option. Just make sure you’ve done the math to see if it’s worth the upfront cost.
Mortgage and Title Insurance Costs
Mortgage and title insurance help protect the lender. There’s a fair amount of risk involved in both borrowing and lending. Several types of insurance cover you and the lender in the event of damage or default.
- Homeowner’s insurance is required for every mortgage (though you can choose your provider), so you already have coverage on your existing home loan. The refinance lender will simply confirm your current policy and isn’t likely to charge a fee for doing so. While you may be happy with your current insurer, refinancing can be a good time to shop around for a better deal on homeowner’s insurance. If you decide to pay your monthly homeowner’s insurance fees through an escrow account with your refinance lender, you may need to put a few months’ worth of payments in the escrow account upfront. Also note that if your current homeowner’s policy is paid by your mortgage provider through an escrow, you should receive a refund for any remaining balance in the account.
- Title insurance covers any ownership or recording issues that could come up over the life of the loan, and lenders generally require you have a title policy. Fees cover the insurance, as well as the title research, however the amount will vary by property location, loan value, and insurance provider, which you can shop around for and choose.
- A mortgage insurance premium is required by loans that are backed by government agencies, like an FHA loan. It protects the lender in the event you aren’t able to make your loan payments. Similarly, if you have a conventional mortgage but make less than a 20% down payment, you’ll be required to pay for private mortgage insurance. Fees for these policies vary from 0.55% to just over 2.0%, and depending on the loan program, they may be an upfront fee or monthly. Note that PMI fees generally drop off once you reach a 78% loan-to-value ratio.
Early Repayment Penalties
Some lenders charge you a fee for paying off your mortgage early. While an early repayment penalty is charged after your loan closes, those fees can add up to more than six months’ worth of interest payments, if you decide to sell your home or refinance too soon after closing your loan. That’s a chunk of change that could make a difference in your decision to refinance.
Fortunately, early repayment penalties aren’t that common. Certain high cost and adjustable rate loans, as well as loans insured or guaranteed by the federal government are prohibited from charging early repayment fees, and some states make them entirely illegal. Even if a loan does carry an early repayment penalty, it’s usually only applicable during the first few years of your mortgage.
That said, it’s still worth making sure your current mortgage doesn’t carry an early repayment penalty before you move forward with your refinance.
A Word to the Wise About “No Cost” Refinance Options
If you’re hoping to get out of paying refinance fees or closing costs by using a “no closing cost” refinance, you’re probably out of luck. The truth is, with a no cost refinance, the total amount of your loan is typically increased to cover the amount of the closing costs — and importantly, you’ll pay interest on that additional amount. Or, as previously mentioned, you could take a slightly higher interest rate in order to receive cash (or lender credits) at closing to cover upfront costs.
That’s not to say it’s a bad idea; it could make getting the right loan terms easier for you overall. Just be sure you realize the fees don’t just disappear on a loan that’s advertised as “no cost,” and always compare loan offers with identical loan amounts.
You’ve heard about low interest rates, learned about the steps involved in a mortgage refinance, and now you know about the expenses involved, too. Paying refinance fees can be worth it, but you’ll need to do the math. Our refinance calculator can help determine if today’s interest rate changes mean more affordable housing costs in your future.
Make your next mortgage move with Ally.