Personal Finance

Refinancing your mortgage will cost more thanks to an 'adverse market' fee

Key Points
  • Lenders are required to pay an "adverse market" fee to Fannie Mae and Freddie Mac, effective Dec. 1, on each refinanced mortgage sold to those government-sponsored agencies.
  • The expectation is that homeowners who go to closing on a refinance near or after that date will absorb at least some of the extra cost through higher interest rates.
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If you've thought about refinancing your mortgage, be aware that it may soon be a more expensive proposition.

Due to a 0.5% "adverse market" fee, effective Dec. 1 and imposed on lenders by mortgage backers Fannie Mae and Freddie Mac, many homeowners are expected to absorb at least some of the cost when they refinance (certain refis are exempt, including those for loan balances below $125,000).

"If you assume it takes two months to close [on the refinance], anything applied for after early October could push to December," said Joel Kan, associate vice president of economic and industry forecasting for the Mortgage Bankers Association.

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For a $280,000 mortgage, the 0.5% fee would mean your lender is an extra $1,400 when your loan is sold to Fannie or Freddie. The expectation is that the extra cost will be passed on to the borrower in the form of higher interest rates.

The adjustment could add an extra 0.125 to 0.25 percentage points, the association estimates. Right now, it's possible to get a 30-year conventional mortgage or refinance at a rate below 3%. A year ago, they were pushing 4%.

The fee was initially scheduled to start Sept. 1, but was delayed in late August to give the industry time to prepare.

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The Federal Housing Finance Agency, which oversees Fannie and Freddie, said the fee is intended to offset a projected $6 billion in losses — largely related to loans in forbearance and, separately, the anticipated rate of default among mortgages backed by Fannie and Freddie as unemployment remains high and economic uncertainty persists.

The fee does not apply to purchases, at least partly due to the increased risk for lenders when it comes to refinances.

"In some ways, refis are viewed as riskier because there's not a market value attached to the property — it's just an appraisal," Kan said.

"If it's a purchase transaction, there's a market price — you know the price because buyers are willing to pay it, so it's a more accurate picture of the market," he said.

"These are the lowest rates we've seen a long time. If there would be a benefit from refinancing, that should be the primary factor influencing your decision."
Joel Kan
Associate vice president of economic and industry forecasting for the Mortgage Bankers Association

Despite the likelihood that many borrowers will end up subsidizing the fee through a higher interest rate, Kan said it should not deter homeowners who could benefit from refinancing.

"These are the lowest rates we've seen in a long time," Kan said. "If there would be a benefit from refinancing, that should be the primary factor influencing your decision."

He said the general rule used to be that refinancing was worth it if the interest rate you pay were to drop by at least 75 basis points (three-quarters of one percentage point) or 1 percentage point.

"Now you see people refinance with a 50 basis-point difference," Kan said. "If you're going from 3.5% to 3% and you had a large-enough balance, it's worth it."

Additionally, be aware that refinance activity continues to keep mortgage lenders busy — 2020 is expected to wrap up with 90% more refinances than 2019. 

"The pipeline is full," Kan said.