Contemplating Refinancing? What You Have to Know In regards to the Hostile Market Payment
The winds of change are blowing through the mortgage market and can affect you when looking to refinance your mortgage.
This is known as the negative market fee, and it changes the number of lenders who are guaranteed the refinanced mortgages they offer. In short, it now costs more for many lenders to be able to guarantee refinanced mortgages. Imagine if your lender buys insurance against you when you fail to pay your mortgage.
What is the negative market fee?
On December 1, Fannie Mae and Freddie Mac, who guarantee about half of the mortgages in America, began charging an adverse market fee to lenders who work with them on refinanced mortgages. This fee is a one-time fee equal to 0.5% of the loan amount.
[ See: Do Low Interest Rates Change Mortgage Rules? ]
Why are you doing that? In 2020, many people chose to refinance their home mortgages in response to financial difficulties. When someone has lost their job, faced with illness, or has other problems, a mortgage refinance is an easy short-term solution. However, someone who is in a difficult financial situation has a higher risk of defaulting on their mortgage. To protect themselves from paying guarantees against many bad mortgages, Fannie Mae and Freddie Mac decide to use this new refinance fee to help diversify risk.
It is important to note that people who borrow for refinance are not working directly with Fannie Mae and Freddie Mac. They work with the banks you borrow from and provide mortgage guarantees that minimize the risk for the banks to lend money on mortgages.
For banks and other lenders working with Fannie Mae and Freddie Mac on mortgage guarantees, the cost of that guarantee to refinance has essentially increased significantly.
Who are Freddie Mac and Fannie Mae?
You may be asking yourself this question, and the answer is pretty simple. Fannie Mae is a nickname for the Federal National Mortgage Association (FNMA) and Freddie Mac is a nickname for the Federal Home Loan Mortgage Corporation (FHLMC). Both the FNMA and the FHLMC are government sponsored corporations, meaning they are organizations created specifically by Congress to provide services to the public or American businesses.
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In this case, both Fannie Mae and Freddie Mac exist in large part to keep the home mortgage market stable. They do this in a number of different ways, but the biggest impact is that they guarantee mortgages, which means they promise to buy mortgages from lenders for a fee if that mortgage gets into trouble because the person borrowing the money no longer is it repaying. This reduces the risk to the lender, but at an upfront cost. Think of it like homeowners insurance – you only pay for it, but you rarely need to use it. The cost of this mortgage guarantee is paid by your lender, but then they pack those costs into the mortgages they offer you.
The negative market fee is just an additional fee that Fannie Mae and Freddie Mac charge lenders when they use their guarantee service on their refinanced mortgages, which is about half of American refinances.
Who has to pay the negative market fee?
Again, this new negative market fee is not paid directly by someone refinancing their mortgage. Rather, it is paid for by the lenders themselves – at least those who use Fannie Mae or Freddie Mac to guarantee their mortgages. About half of the mortgages in America are guaranteed by either Freddie Mac or Fannie Mae, so these mortgages are only directly affected.
Who is exempt?
All lenders who do not use Fannie Mae or Freddie Mac to guarantee their refinanced mortgages are exempt from this fee. However, other companies that offer mortgage guarantees may choose to charge a similar fee or increase their interest rates. This means that any lender who uses these other mortgage guarantors will have to bear these additional costs as well.
How does the negative market fee affect my refinancing?
Unsurprisingly, most lenders simply pass the cost of this additional fee on to borrowers. This will show up as either an additional initial fee or a slightly higher interest rate when you borrow from a lender using Fannie Mae or Freddie Mac to guarantee their mortgages.
What about the lenders who don’t use Fannie Mae and Freddie Mac? It all depends on what fees are passed on to them by the mortgage guarantee companies they use. Obviously, without these fees it will be easier for them to assert themselves, but they will likely increase their refinancing fees and rates a bit anyway to keep keeping in line with the market, as this change directly affects at least half of the market. If half the market is charging a new fee now because it is necessary, the rest of the market will likely be charging more too.
[ Read: Should You Buy When Mortgage Rates Are at Record Lows? ]
How is the fee implemented?
Again, this fee remains essentially invisible to borrowers. What they’ll see in late 2020 and early 2021 are higher overall refinance rates, led by lenders being directly pushed to hike their interest rates by the higher fees charged on them by Fannie Mae and Freddie Mac and then the domino effect of others Companies following suit, either to make additional profit for themselves or because their mortgage guarantors added fees or increased interest rates.
Is now a good time to refinance?
Borrowers looking to refinance their mortgage in late 2020 and early 2021 are likely to see a mix of higher interest rates and higher fees than borrowers earlier in the year. Even so, mortgage rates still remain at all-time lows, so it’s not a bad time to refinance, especially if you’re refinancing an older mortgage at a higher rate.
The four main reasons for refinancing your mortgage are when your creditworthiness or financial situation has improved, mortgage rates have decreased, you need cash out of your home’s equity, or need to cut your monthly payments. The only thing that has changed with the new fee is that unless your mortgage is several years old, you are less likely to see a much better interest rate than you are likely to already have on your mortgage. The other reasons remain unchanged, and refinance rates are still good, if not quite as low as they were for much of 2020.
If these reasons apply to you, it pays to take a look at the better refinancing companies and see what interest rates are currently available for refinancing. However, you should take a close look at the additional fees they charge.
Too long, not read?
The adverse market fee does not directly affect borrowers. Rather, it affects the lenders as many of them now have a higher cost on one of the keys they use, namely, refinanced loan mortgage guarantees. However, these costs indirectly affect borrowers as lenders increase refinancing rates or add additional fees and pass the cost of the adverse market fee on to borrowers. However, we are still in a period of historic lows in mortgage rates. So it’s still a good time to refinance if you need to – it’s just not quite as good as it was at the beginning of 2020.
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