Here comes a new fee
Lenders are expected to push their rates higher this fall as Freddie Mac and Fannie Mae impose a new fee — for real this time.
The government-sponsored companies, which buy or guarantee most U.S. home loans, initially told lenders in mid-August that a 0.5% on refinance loans would take effect on Sept. 1. And, lenders freaked out.
Within two days, the average rate for a 30-year fixed-rate mortgage soared from 2.92% to 3.14%, according to Mortgage News Daily. Rates cooled off again in late August, when Fannie and Freddie's regulatory agency put the fee on hold until Dec. 1.
Zillow economist Matthew Speakman says the surcharge is likely to mean "substantive increases" in mortgage rates this fall, and way earlier than you might think.
"Even though the adjustment won’t officially be imposed until Dec. 1, lenders are likely to start applying it to loans as soon as October, meaning the adjustment’s impact will likely show up in rate quotes in as little as a few weeks," he writes.
That means house shoppers looking to buy, and homeowners wanting to refinance, should lock a low mortgage rate quickly.
How much higher will rates go?
Fannie Mae and Freddie Mac say they need the revenue from what they're calling the "adverse market fee" to cover their expected losses from defaults and other issues related to the coronavirus financial crisis.
As the fee becomes a thing, it's likely to increase mortgage rates by one-eighth to one-quarter of 1 percentage point (0.125 to 0.25), says Matthew Graham, chief operating officer of Mortgage News Daily. In other words, today's 30-year rate of around 2.85% would jump as high as 3.10%.
"While that might not sound significant, this is the biggest change of its kind, ever," Graham says.
Here's what that difference would mean for a borrower:
- A $250,000 30-year fixed-rate mortgage at 2.85% would have a monthly principal and interest payment of $1,033. The borrower would pay more than $122,000 in interest over the 30 years.
- A $250,000 30-year fixed-rate mortgage at 3.10% would have a monthly principal and interest payment of $1,067. The borrower would pay more than $134,000 in interest over the 30 years.
With the rate hike, you'd pay an additional $408 a year — and more than $12,000 extra over time. So, borrowers have "a compelling cases for locking," says Graham.
But first, you've got find a low rate and the lender who will give it to you. Get mortgage offers from a bunch of lenders and compare them, to uncover the best deal in your area and for a person with your credit score.
If your comparison shopping is successful, remember that when you buy or renew your homeowners insurance. Seek rate quotes from multiple insurers and look at them side by side, to get the coverage you need without paying too much.