Homeowners across the country are rushing to refinance at
record-low interest rates. Many are finding that lenders have reserved their
best rates for buyers.
The average rate posted on Bankrate.com for a 30-year fixed
refinance mortgage was 3.39% Monday, well above the 3.14% on offer for a
purchase mortgage, according to the personal-finance website.
The rate premium for refis over purchases widened this
spring after the coronavirus pandemic shut down the economy and pushed interest
rates lower across the board. The spread grew even bigger after Fannie Mae and
Freddie Mac last week levied a new fee on lenders for most refinancings to
shield themselves from potential losses.
Mortgage lenders are still dealing with a flood of
homeowners seeking to refinance, and some in the industry are struggling to
keep up with demand. As of last week, nearly 18 million homeowners could still
save money by refinancing, near an all-time high even after months of record
low rates, according to mortgage data and technology company Black Knight Inc.
“The system is maxed out,” said Sam Polland, a mortgage-loan
officer at Sandy Spring Bancorp Inc. in Rockville, Md. “Everyone is in this bad
but good position.”
With so much demand, some mortgage lenders are prioritizing
purchases, often offering lower rates to grab new business.
Some mortgage bankers say they prefer to make
purchase-mortgage loans over refis. Their per-loan compensation is typically a
bit higher for purchases, according to mortgage-technology company LBA Ware.
Financing home purchases also can often lead to more business through referrals
and refis down the road. Refinancings, on the other hand, come and go with
rates.
Many factors go into the rate borrowers eventually receive,
including their credit standing, the type of loan and how much they pay upfront
to lower their rate. A refi where the borrower pulls cash out, for example,
would typically have a higher rate than a traditional refi.
The advertised rates for purchases and refis tracked fairly
closely through much of 2018, 2019 and early 2020, according to Bankrate.com.
But when the pandemic pushed borrowing costs down in late
March and early April, interest rates for purchase mortgages fell faster than
for traditional refis, according to rate-lock data from Optimal Blue, a mortgage
technology and data company.
Last week, Fannie Mae and Freddie Mac said that they would
charge lenders an extra 0.50 percentage point to buy most types of refinancings
that they back. That fee is likely to be passed on to homeowners, further
pushing up refi rates relative to purchase rates.
The two mortgage giants don’t extend loans, but instead buy
nearly half of the ones that are made and package them into bonds to sell to
investors. They guarantee those investors will be repaid, thereby helping keep
rates low. In turn, lenders pay Fannie and Freddie fees that vary by loan type.
The extra fee for refis may translate to a rate on a Fannie-
or Freddie-backed loan that is roughly an eighth of a percentage point higher,
lenders said. That means a refinance loan that would otherwise have a rate of
3% might now have a rate of 3.125%.
Michael Menatian, president at Sanborn Mortgage Corp., said
a number of clients called him late last week to try to lock in low refinance
rates because of the extra fee. Many ended up with rates that weren’t as low as
they expected or decided to hold off for now, he said.
“It’s punishing borrowers who could really use this in these
difficult, challenging times,” Mr. Menatian said of the refinancing fee.
Mr. Polland of Sandy Spring Bank said that he was able to
offer a 30-year fixed-rate purchase loan at 2.5% for a $500,000 house with a 5%
down payment. For a refi on the same property, the rate would be 2.875%.
One of his clients, Kate Fensterstock, a teacher in
Rockville, Md., approached him about a cash-out refinancing earlier this month.
The rate on offer was 2.625%, which would have allowed her to keep her monthly
payment the same and take out cash for home renovations on the three-bedroom
she shares with her husband and two teenage sons.
Late last week, Mr. Polland informed her that, because of
the refi fee, her rate would instead be 2.875%. She is planning to go through
with the deal but will take out less cash.
“We’re not going to be able to do all the things we want,”
Mrs. Fensterstock said. “It’s really frustrating.”
Write to Ben Eisen at ben.eisen@wsj.com
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