What Was The Adverse Market Refinance Fee?

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In December 2020, the Federal Housing Finance Agency (FHFA), the conservator of Freddie Mac and Fannie Mae loans, introduced the adverse market refinance fee. This fee would basically make mortgage refinancing more expensive as it would charge 0.5% of the loan in closing costs or it would be translated into a higher refinance rate. Fortunately, the FHFA eliminated that fee on July 16, 2021.

What You Should Know

  • The adverse market refinance fee was introduced by FHFA in December 2020 in order to protect Fannie Mae and Freddie Mac from losses during the pandemic
  • The adverse market refinance fee was equivalent to 0.5% of the loan amount or it would come in the form of a higher refinance rate
  • The fee was only applied to conforming loans bigger than $125,000

What is the Adverse Market Refinance Fee?

The adverse market refinance fee is charged to borrowers that want to refinance a conforming loan. The fee is equal to 0.5% of the loan amount. For example, if you want to refinance into a $250,000 loan, you will have to pay an adverse market refinance fee of $1,250. This fee can also take the form of a higher interest rate. So, instead of the lender charging you 0.5% of your loan amount at closing, they would instead increase your refinance rate by 0.125% to 0.25%.

Adverse Market Refinance Fee Infographic, Mobile

Who was affected by the fee?

Only certain loans were subject to the adverse market refinance fee. This included conforming loans above $125,000. The majority of loans given out are conforming, which means that a lot of borrowers would be impacted by this change. The loans that were exempt from the fee included:

As you can tell, non-conventional loans were not affected by the fee. Since they are backed by the government and are not acquired by Freddie Mac or Fannie Mae, they do not have to follow their standards. On the other hand, Home Possible loans by Freddie Mac and HomeReady by Fannie Mae were also excluded.

When and why was the adverse market fee introduced?

Conforming loans are backed by the government-sponsored agencies Freddie Mac and Fannie Mae. Lenders who give out these loans would later sell them to these entities. Therefore, the loans need to follow the criteria and standards set by Freddie Mac and Fannie Mae as they are the ones assuming the risk. During the pandemic of Covid-19, because of rising unemployment and the COVID-19 recession, there was increasing concern on the costs that would be incurred if homeowners failed to pay back their mortgages. That is why the FHFA introduced the adverse market refinance fee in December 2020.

The FHFA later decided to remove the fee after it found out that approximately only 2% of the single-family mortgages were still in forbearance in April 2021. The elimination of the fee would mean that it would now be cheaper to refinance your loan.

How much can you save now?

Borrowers of conforming mortgages can now benefit from the removal of the adverse market refinance fee. To better understand the savings incurred by the change of policy, we will walk you through an example comparing the interest charged with and without the adverse market refinance fee.

Imagine that you have a loan of $300,000 that you want to refinance. Your current interest rate is 4.5% and the monthly payment that you currently make is $1,520.

Including the Adverse Market Refinance FeeExcluding the Adverse Market Refinance Fee
Before Refinancing
Loan Balance$300,000$300,000
Interest Rate4.5%4.5%
Monthly mortgage payment$1,520$1,520
After Refinancing
New interest rate3.75%3.625%
New monthly mortgage payment$1,389$1,369
Interest Savings over 30-year term$47,055$54,685
Savings from excluding the fee
= $54,685 - $47,055 = $7,630

When there is an adverse market refinance fee, your refinance rate is 0.125% higher than it would be without it. This increase results in a higher monthly payment, specifically $20 higher. The savings may not seem a lot when comparing it on a monthly basis, however, during the 30 years of your mortgage, it will end up saving you $7,630, which is a considerable amount. Similarly, instead of a higher rate, the lender may charge you 0.5% on the loan of $300,000, which would cost you $1,500 upfront.

Should you refinance your mortgage?

The answer to whether you should refinance your mortgage or not depends on the closing costs that you will have to pay and the savings that will result from refinancing. If closing costs are higher than the savings to be incurred throughout the whole term of the mortgage, then the answer is clearly to not refinance. Typically, this is not the case.

It might take a considerable amount of time before you break-even on the closing costs and start making ‘real’ savings by refinancing. Therefore, you should only refinance if you plan to keep living in the house longer than the break-even period.

The adverse market refinance fee can affect the break-even point of refinancing in two ways:

Decreased savings

If the adverse market refinance fee comes in the form of an increase in interest rate, that means that you won’t end up saving as much in interest. The point of refinancing is to get better terms such as a lower mortgage rate and this benefit is offset by the adverse market refinance fee. Smaller savings means that it will take you longer to make back the refinancing closing costs. Therefore, you would have to stay in the house for a longer period of time in order to see some ‘real’ savings.

Increased closing costs

On the other hand, if the adverse market refinance fee is 0.5% of the loan amount, that means that your closing costs will increase because they will also include the fee. If the closing costs are higher, it will take more time for the interest savings to break even with these costs. Therefore, the breakeven period will be longer and the benefit you get from refinancing will be smaller.

Refinancing with no closing costs

Some lenders claim to offer refinancing with no closing costs. This would be too good to be true for borrowers who want better terms at no cost. However, this is not the case. Lenders typically require borrowers to pay a higher mortgage rate for the benefit of not paying any closing costs and the actual closing costs are simply rolled over into the loan’s balance. You may even end up paying more in interest during the whole term of the loan then the closing costs in total. Although, this may be a good alternative for borrowers who cannot afford to pay for closing costs upfront and would rather make higher mortgage payments.

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