Breaking: Fannie Mae’s RefiNow will be available starting June 5, 2021 and Freddie Mac’s Refi Possible will be available August 30, 2021.
Helping homeowners when a refi doesn’t “pencil out”
Two new programs – Fannie Mae’s RefiNow and Freddie Mac’s Refi Possible – could soon help many homeowners refinance less expensively.
One of the barriers to refinancing is the high cost.
Millions of homeowners missed out on the refi boom of 2020 because the refinance didn’t pencil out: it would take too long to recoup the costs, especially for those with lower loan amounts.
These programs seek to do something about that.
RefiNow and Refi Possible: What to know
The Federal Housing Finance Agency (FHFA), the overseer of Fannie Mae and Freddie Mac, is soon to issue a new kind of refinance sometime in the summer of 2021.
It should help bring refinance costs down considerably, by:
- Eliminating the “adverse market fee” for loans at or below $300,000
- Issuing up to a $500 credit toward the appraisal, if one is required
What is the “adverse market fee”?
This is a fee introduced in late 2020 which added a fee to most refinances equal to 0.50% of the loan amount.
For example, on a $250,000 mortgage, the refinancing homeowner had to either pay a $1,250 fee out-of-pocket, roll it into the new loan, or accept a higher interest rate in lieu of the fee.
The fee’s goal was to compensate for greater risk in the market due to the coronavirus pandemic.
Yet, it was just enough to keep many homeowners from refinancing.
$500 appraisal credit? That sounds generous
It is. The appraisal is one of the more expensive parts of refinancing.
Homeowners will receive a credit from the lender of $500 or the actual appraisal cost, whichever is lower.
Many refinancing homeowners receive an appraisal waiver when they apply for a refinance, though. They will not receive a credit, as there is no appraisal cost. But a waiver is even better: you don’t have to wait for an appraisal to be done.
Waivers are determined by Fannie Mae or Freddie Mac’s computerized underwriting system at time of application.
Who will qualify for RefiNow and Refi Possible?
These lower-cost refinance programs will be available for homeowners with Fannie Mae- or Freddie Mac-backed mortgage loans.
That doesn’t mean you make payments to Fannie Mae or Freddie Mac. One of these agencies might own the loan even though you make payments to Bank of America, US Bank, Wells Fargo, or other servicers.
Those with an FHA, VA, or USDA loan will not be eligible.
Homeowners also need to have:
- An income that’s 80% or less than their area median income
- A single-family home that serves as their primary residence
- A loan-to-value ratio of 97% or lower
- A debt-to-income ratio of 65% or lower
- A FICO score of at least 620
- No late mortgage payments in the last six months and no more than one in the last year.
In addition, the refinance:
- Must drop the homeowner’s payment by at least $50 per month
- Must drop the homeowner’s rate by at least 0.50%
As an example, your current principal and interest payment is $1,200 per month and your rate is 4.5%. You apply with a lender, who can offer 3.75% with a payment of $1,100 per month. You would be eligible, assuming you meet other criteria and underwriting standards.
To qualify for the adverse market fee waiver, your new loan amount must be at or below $300,000.
Additionally, expect other eligibility restriction will apply and to be generally the same if you have a Fannie Mae or Freddie Mac loan. This program is still in early stages and may change by the time it rolls out.
How will RefiNow and Refi Possible help homeowners?
A refinance only makes sense if it saves you money over the long term.
Typically, refinancing homeowners use the “break-even” method. They calculate how long it will take to make back the cost of refinancing.
If closing costs equal $3,000, it will take 30 months to break even with $100-per-month savings.
Now assume this same homeowner reduces her refi costs to $1,500, thanks to RefiNow or Refi Possible. Now, it takes just 15 months to recoup costs.
The refi becomes much more attractive.
Homeowners with low loan amounts
These programs could be especially helpful to those with low loan amounts.
It’s very difficult to recoup refi costs if you have a low loan amount, say under $200,000. You have to drop your rate significantly to see worthwhile savings.
- Going from 4.5% to 3.5% on a $400,000 mortgage: $230/mo savings
- Going from 4.5% to 3.5% on a $150,000 mortgage: $85/mo savings
Closing costs on the $150,000 mortgage, unfortunately, are not usually that much lower than for bigger loans. So it takes much longer to recoup costs.
RefiNow and Refi Possible could make refinancing “pencil out” for homeowners with low loan amounts.
When will these refinance programs be available?
Fannie Mae’s RefiNow will be available starting June 5, 2021 and Freddie Mac’s Refi Possible will be available August 30, 2021.
Keep in mind, though, that lenders must implement these programs internally before they become available to consumers. Check back often for updates.