Refinancing your home is about to get a lot more expensive, so if it’s been something you’ve been considering, now is the time to act.
On September 1st, a new fee was set to go into effect, called an “adverse market refinance fee” (Fannie Mae) or a “market condition credit fee” (Freddie Mac). The fee is 0.5% of your total loan amount, which can make refinancing prohibitively expensive. You’ll only be subject to the fee if your refinanced mortgage is sold to Fannie Mae or Freddie Mac, though we should note that 70% of loans are purchased by one of these enterprises.
The reason this fee is on the table at all is due to the COVID-19 induced economy, which makes mortgages riskier. And, as more people are refinancing their mortgages in an effort to lower their payments and take advantage of today’s record-low interest rates.
However, this new fee has now been delayed until December 1st, giving homeowners more time to decide if refinancing is the way to go.
There are five main benefits to refinancing, but each pro has a potential con as well.
Lower Monthly Payments
Once you’ve been making payments for a few years, you’ve built up some equity. Refinancing allows you to lower your monthly payments and get some wiggle room in your budget.
The Good: You get to lower your monthly payment and free up some cash.
The Bad: Your 30-year mortgage resets, and that means you’ll pay substantially more in interest over the life of your loan.
Lower Interest Rate
Interest rates are at record lows, and they don’t really have any direction to go from here but up. The same is true for refinance rates.
Further, if your credit score has improved or your income has gone up, you can also get access to a lower rate. You don’t have to be a financial whiz to know that lower interest rates put more money in your pocket and can save you thousands (or hundreds of thousands) of dollars.
The Good: You can end up paying less interest.
The Bad: Depending on how long you’ve had your loan, you might not save much, if anything. Keep in mind that refinancing is not free, so you have to take those costs into account.
Switch to a Fixed Rate
If your loan started as an adjustable-rate mortgage (ARM), then that low introductory rate could be about to expire. If so, you might want to get a fixed rate at today’s lows to protect you from rising costs in the future.
The Good: If you can switch to a lower rate, you save on interest, while also having stability and certainty about future payments.
The Bad: There’s also a chance that rates can drop, and if that happens, you’ll have to pay the piper if you want to refinance again. Given how low rates are currently, the chance of them dropping even further from here is unlikely (but not impossible).
Reduce Your Loan Term
A mortgage refinance doesn’t necessarily have to reset your mortgage back to day one. You could elect to shorten your loan term. Yes, your payments will go up, but the amount you pay in overall interest will drop.
The Good: Paying less interest is always a good thing. Plus, you’ll be free of your mortgage sooner. As an aside, did you know that the term “mortgage” is derived from a term in the Middle Ages that means “death pledge?” Thankfully, it’s not referring to the borrower’s death, but instead to the death of the loan obligation.
The Bad: Your monthly payment will go up. Consider what else you could be doing with those funds to earn a higher interest rate than what you’re paying for a mortgage.
Cash Out Refinance
If you need cash to pay for your child’s college education, or you need a low-interest loan to start your dream business venture or do a remodel, then you can take some cash out of your home. This allows you easy access to capital without having to resort to high-interest vehicles like credit cards.
The Good: Having access to cash is always a good thing!
The Bad: You lose years of equity that you’ve built, and you’ll end up paying more interest in the long run. It can be tempting to use your house as an ATM, but make sure you think through all of your options first.
The Bottom Line:
On the surface, refinancing your home seems like a no brainer, and if you’ve been on the fence about it, now is the time to act before these new fees take effect.
Keep in mind, however, that refinancing is not free. You’ll have to pay the following:
- Application fee: Between $75 and $500
- Origination fee: Up to 1.5% of the loan amount (plus an additional 0.5% as of December 1st)
- Credit report fee: $30 to $50
- Home appraisal: $300 to $400
- Home inspection: $300 to $500
- Flood certification fee: $15 to $25
- Title search and insurance fee: $400 to $900
- Recording fee: $25 to $50
- Reconveyance fee: $50 to $65
When weighing the pros and cons of refinancing, consider how long you plan on staying in your home. If your goal is to live out the life of your mortgage (or at least stay for another decade or so), then refinancing could be the way to go.
If you plan on relocating within a few years, though, then you won’t get much, if any, benefit.
