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How refinancing your mortgage now costs less

A man and a women hands hold a money bags in the public park for loans to planned investment in the future concept.
Watchara Ritjan / Shutterstock

Sunday, Aug. 1, marked the formal end of a wildly unpopular fee that had added 0.5% to the cost of a refinance since late 2020.

The surcharge was announced nearly a year ago by the Federal Housing Finance Agency. It's the regulator that oversees Fannie Mae and Freddie Mac, the government-sponsored mortgage giants that buy most U.S. home loans from lenders.

The FHFA initially said the fee would take effect on Sept. 1, 2020, to "cover projected losses of at least $6 billion" at Fannie and Freddie due to expected defaults and foreclosures related to COVID-19. After the news was met with widespread anger from lenders, the FHFA delayed implementation until Dec. 1.

The mortgage bankers estimated that the fee cost the average refinancing homeowner $1,400. Borrowers paid it either as an upfront charge or as a mortgage rate increase of between one-eighth and one-quarter of 1 percentage point (0.125-0.25), according to an analysis by Mortgage News Daily.

But as the housing market exploded thanks to record-low mortgage rates, and with more pandemic job losses affecting renters than homeowners, Fannie Mae and Freddie Mac never took the expected financial hits. The FHFA's "adverse market fee" became an unnecessary burden — so the agency decided to kill it.

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Goodbye fee, hello savings

“Eliminating the adverse market refinance fee will help families take advantage of the low-rate environment to save more money," FHFA acting director Sandra L. Thompson said in a July 16 announcement.

As lenders stopped rolling the fee into their mortgage rates, the average for a 30-year home loan dropped from 3.04% on July 15, to 2.78% on Monday, Mortgage News Daily's data shows.

Now that you won’t be on the hook for a 0.5% fee that could have cost you thousands of dollars, refinancing your mortgage at today’s rock-bottom interest rates can save you an even fatter stack of cash.

But just because rates are low doesn’t mean a lender will automatically offer you the lowest rate available in your area. For that to happen, you need to put your best foot forward as a borrower.

How to land the lowest possible refi rate

Happy african american family couple sit at home office shopping for a low mortgage rate.
fizkes / Shutterstock

If you haven’t done so in a while, take a look at your credit score. Today you can easily check your credit score for free. The lowest mortgage rates tend to be offered to borrowers with the highest scores, so once you know where you stand, you can improve your score, if needed, before reaching out to lenders.

They'll need to know you’ll have an adequate amount of cash each month to make your mortgage payment. They won't have much confidence if you’re carrying multiple high-interest debts, like credit card balances. Taking out a single, lower-interest debt consolidation loan can cut the cost of your debt, help you pay if off faster and improve your cash flow.

Once you decide to move forward with a refinance, don't settle on the first lender that claims to offer "the lowest rates around." Most of them say that. Check mortgage rates from at least five lenders to find the loan that best fits your budget.

And don’t be discouraged if a refi isn't possible, because there are other ways of cutting the cost of homeownership. When the time comes to buy or renew homeowners insurance, a little comparison shopping could save you hundreds of dollars.

The same approach can help you save big on car insurance, too.

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Clayton Jarvis is a mortgage reporter at MoneyWise. Prior to joining the MoneyWise team, Clay wrote for and edited a variety of real estate publications, including Canadian Real Estate Wealth, Real Estate Professional, Mortgage Broker News, Canadian Mortgage Professional, and Mortgage Professional America.

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