New refinance could save low-income borrowers $2,000-$3,000 per year

Aly J. Yale
The Mortgage Reports contributor

FHFA’s new refinance could mean big savings for low-income homeowners

It’s about to get easier for low-income homeowners to refinance. 

Thanks to a new initiative from the Federal Housing Finance Agency (FHFA), low-income borrowers with Fannie Mae- or Freddie Mac-backed loans will soon be eligible for reduced-cost refinances that lower their monthly payments and their interest rate considerably.

According to the agency, the option will save borrowers anywhere from $100 to $250 per month, on average. That’s a total savings of $2,000 to $3,000 per year.

Here’s what you need to know about the program.

Verify your refinance eligibility (May 8th, 2021)

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How would the new refinance option work?

The new refinance option — which should become available this summer — is dubbed RefiNow by Fannie Mae and Refi Possible by Freddie Mac. It would target lower-income borrowers with conforming mortgages who could benefit from lower interest rates and payments.

Those who qualify would see their monthly mortgage payment reduced by at least $50 and their interest rate lowered by 50 basis points or more (for example, 3.5% vs. 3.0%). 

Those who qualify would see their monthly payment reduced by at least $50 and their interest rate lowered by 50 basis points or more.

Some borrowers could also receive a $500 credit to cover the appraisal, and the adverse market refinance fee — which charges 0.50% on loans of $125,000 or more — may be waived.

With a typical refinance, these types of waivers and guaranteed reductions are not available. Any reductions in rate or payment are directly tied to the borrower’s qualifications — their credit score, debt-to-income ratio, home equity share, and more.

Generally speaking, the better a borrower’s credit, the more they could reduce their costs. 

Verify your refinance eligibility (May 8th, 2021)

Potential savings for homeowners 

The potential savings of the RefiNow and Refi Possible programs could be huge.

According to the FHFA, it should be around $100 to $250 per month on average. But depending on the borrower, it could be larger or smaller, too.

Here’s an example: Say you took out a $200,000 loan at a 5% interest rate in January 2018. The loan came with a $1,073 monthly payment. Since it’s been three years, you’ve paid down your balance slightly, and you currently have about $188,000 left on the loan. 

If you qualified for the program, you could refinance into a new, 30-year loan with an interest rate of 4.5%. That would reduce your monthly payment to $952 per month — a difference of around $120 or, over the course of one year, more than $1,440 saved. 

That, of course, doesn’t include the savings from the appraisal waiver ($500) and the adverse market fee.

The adverse market fee charges 50 basis points (0.50%) of all loan balances over $125,000. So for a $188,000 loan, you’d pay $940. That means refinancing will become much more affordable for homeowners who qualify to have the fee waived.

Who will be eligible for the new refinance program? 

To qualify for the new low-income refinance program, you’ll need to have a loan that’s guaranteed by either Fannie Mae or Freddie Mac. If you’re not sure whether your loan falls into this category, use Fannie and Freddie’s lookup tools.

Other requirements include:

  • Your income must be at or below 80% of the area’s median income
  • You must not have missed any mortgage payments in the last six months and no more than one in that last 12 months
  • Your current loan-to-value ratio can be no larger than 97%
  • Your debt-to-income ratio can be no higher than 65%
  • Your credit score must be 620 or higher

Your home also must be a single-family, one-unit property that you occupy as your primary residence (no investment properties or multi-family homes/duplexes.)

Why is FHFA targeting low-income borrowers? 

Refinancing has been hugely popular in the past year, especially with mortgage rates hovering near historic lows. But according to FHFA, lower-income homeowners didn’t have the same opportunities to refinance their homes.

“Last year saw a spike in refinances, but more than 2 million low-income families did not take advantage of the record low mortgage rates by refinancing,” said Mark Calabria, FHFA director.

“This new refinance option is designed to help eligible borrowers who have not already refinanced save between $1,200 and $3,000 a year on their mortgage payment.”

“It’s a very homeowner-friendly move that should help people stay in their homes and give them more financial breathing room.” –Jeff Taylor, Co-founder, Mphasis Digital Risk

The program can also help lower-income families struggling due to the pandemic by freeing up cash flow and reducing their monthly financial burden. It could even help down-on-their-luck borrowers keep their homes in some cases.

“The money saved by refinancing can be used to help those who have experienced a job loss or some financial impairment since the start of the pandemic,” said Jeff Taylor, co-founder of Mphasis Digital Risk and a board member at the Mortgage Bankers Association.

“It’s a very homeowner-friendly move that should help people stay in their homes and give them more financial breathing room,” he says.

When will the new refinance program be available? 

There’s no hard-and-fast start date for the new program, but FHFA has said it will be available “beginning” in the summer. That could mean qualifying borrowers could apply as early as June. 

Only time will tell though, and we’ll keep you updated as more details about the RefiNow and Refi Possible programs emerge.

Should you wait to refinance until this program is available? 

There’s no way to perfectly time your refinance, but for lower-income borrowers, the FHFA’s new initiative just may be worth the wait. With the guaranteed rate cut, reduced monthly payment, and waived fees, the savings could be significant.

If you’re worried about interest rates rising, you could consider applying for your refinance now and choosing an extended rate lock. This would allow you to lock in today’s historically low rates as you wait for summer to roll around.

You can also speak to a loan officer or mortgage broker for more specific advice. They can guide you on the best move for your financial situation.

Verify your new rate (May 8th, 2021)