Low mortgage rates have kept the housing market among the few bright spots in a dark year, particularly for the wave of homeowners easing their cash flow with a mortgage refinance or switching to a shorter loan term.

Refinancing is anticipated to account for approximately $1.75 trillion of the more than $3 trillion in mortgage financing in 2020, according to the Mortgage Bankers Association.

But not every homeowner can refinance at the low mortgage rates that are advertised and reported each week. A wide range of factors goes into individual mortgage rates, including a new “adverse market refinance fee” that took effect Dec. 1. The fee is implemented by the Federal Housing Finance Agency (FHFA), which oversees quasi-government agencies Fannie Mae and Freddie Mac.

“Earlier this year, FHFA saw that a byproduct of covid-19 might be loan losses because of the foreclosure moratorium and from mortgage defaults once forbearance ends,” said Paul Buege, president and CEO of Inlanta Mortgage, based in Pewaukee, Wis. “They imposed a fee of 0.5 percent on refinance loans, which comes to $1,000 on a $200,000 loan.”

Forbearance programs allow borrowers to put their mortgage payments on hold if they are in a financial crisis due to the pandemic.

Refinances for loan balances under $125,000 are exempt from the fee, as are affordable refinance programs from Fannie Mae and Freddie Mac.

“Lower-income borrowers are not impacted by this, but the higher your loan balance, the higher the impact of the fee,” Buege said.

Since the fee will be charged on loans that closed on or after Dec. 1, lenders have already priced in the 0.5 percent fee in their mortgage rates or in loan origination fees, said Brian Gilpin, vice president of capital markets for Embrace Home Loans in Middletown, R.I.

“After the financial crisis in 2008, there was a fee on loans to help backstop losses,” Gilpin said. “The government is trying to do the same thing now because of the number of forbearances.”

Gilpin said the additional cost of the FHFA fee on a $300,000 30-year fixed-rate loan would be about $14 per month.

“The fee only applies to conventional loans that will be sold to Fannie Mae or Freddie Mac, not to FHA loans or VA loans,” said Patrick Boyaggi, CEO of Own Up, a Boston-based mortgage technology company. “It also doesn’t apply to loans that lenders keep in-house, called portfolio loans, that are not sold to Fannie Mae or Freddie Mac.”

Tighter standards

While mortgage rates have been historically low this year , some experts think rates could be even lower if lenders were not so overwhelmed with loan applications.

“Lenders are having a hard time keeping up with the volume of applications from homeowners and purchasers, so some have raised rates a little to maximize their profits while reducing their loan volume,” Boyaggi said. “Rates are so low even with a little increase that they’re still compelling to consumers.”

Most lenders saw their normal volume of loan applications increase by 400 percent this year, so they’re willing to have consumers shop around and go elsewhere to slow demand, said Kevin Parker, vice president of field mortgage operations for Navy Federal Credit Union in Hyattsville, Md.

“Normally, the mortgage rates for a purchase loan and a refinance are about the same, but right now a lot of lenders are prioritizing purchase loans and offering slightly lower rates on those,” Gilpin said. “It changes day-to-day, but there’s maybe a 0.25 percent higher rate for a refinance.”

Lenders want to increase their pool of new customers with home buyers who may recommend them to other borrowers and may refinance with the same lender in the future.

The mortgage rate you’re offered is likely to be slightly different from one lender to another and will vary daily until you lock in the rate. Your lender can recommend how long to lock in the rate depending on the timeline for completing your refinance.

“No mortgage is exactly like any other mortgage, so it’s important to get personal guidance from a lender who can help you decide the best option,” Parker said.

For lenders, each mortgage loan requires an evaluation of the risk of the borrower defaulting on the loan.

“The riskier the loan, the more the lender wants compensation for that risk and will charge a higher interest rate or fee,” Boyaggi said.

Among the risk factors that lenders evaluate are:

● Credit score: Conventional loans have tiered rates based on your credit score, with the lowest mortgage rates offered to borrowers with the highest credit scores. The top tier, according to myFICO.com, is for borrowers with a credit score of 760 and above.

● Home equity: Your rate will vary according to how much of your home value you’re borrowing. While some lenders will allow you to refinance up to 95 percent of your home value, your mortgage rate will be higher when you refinance more than 80 percent, Parker said.

● Type of property: Typically, a second home or investment property will have a slightly higher mortgage rate than a primary residence because borrowers are more likely to default if they must on a vacation home rather than their residence. In addition, condos carry a slightly higher risk and therefore have a slightly higher mortgage rate.

“Your rate also depends a lot on the lender you choose, because different lenders have a different appetite for risk,” Boyaggi said. “Your mortgage rate can vary by as much as 0.5 percent or 1 percent for the same loan from different lenders.”

To accurately compare mortgage rates from one lender to another, it’s important to compare the Annual Percentage Rate (APR), said Joe Tyrrell, president of ICE Mortgage Technology, a division of Intercontinental Exchange for the mortgage financing industry that encompasses Ellie Mae and other entities. The APR includes both the interest rate on the loan and the total cost of the loan amortized over the loan period.

“Lenders offer ‘no cost’ or ‘no points’ loans, but sometimes they have those costs wrapped into the loan or origination fee,” Tyrrell said. “That makes it important to look at the APR. You also need to make sure you’re comparing a 15-year loan with another 15-year loan and not a 30-year loan.”

Most lenders use an automated system to evaluate a borrower’s ability to refinance or purchase a home. The automated systems are tweaked often, Buege said, so sometimes someone who might have qualified a year ago won’t qualify today.

The Mortgage Bankers Association’s data from its credit availability index showed that lenders have tightened credit this year because of their concern about the health of the job market.

In addition, the association reported that tightening in some conventional and government loan programs that had previously allowed for lower credit scores, lower down payments and reduced documentation is driving the overall decline in credit availability.

Nearly three-fourths of all refinances (74 percent) that closed in September were for borrowers with a FICO score of 750 or higher, according to Ellie Mae’s Origination Insight Report.

“The average FICO score for all closed loans jumped from 738 in January to 753 in September, which is indicative of the heavy refinance market,” Tyrrell said.

Approximately 58 percent of all mortgage loans that were closed in September were refinances, with the average time to close a refinance at 54 days, according to Ellie Mae.

Borrowers should anticipate several verifications of their employment from lenders, including just before the closing. If you have lost income or your job, a refinance may still be possible depending on other sources of household income and your debt-to-income ratio, which compares your minimum payment on all debt with your gross monthly income, Parker said. However, unemployment benefits cannot be used to qualify for a loan.

“Talk to a lender to establish a plan so you can refinance and take advantage of low rates in the future even if you’re not able to qualify now,” Buege said.

Why refinance?

Low mortgage rates encourage homeowners to look into refinancing, but it’s not always the right decision for every borrower. Homeowners need to pay closing costs on a refinance with cash or by wrapping them into their new loan balance, so it’s smart to calculate when you will recoup those costs.

Snagging a low mortgage rate can save you money, but there are other reasons to consider a refinance than just bragging rights about a low rate.

“While some people look for a rate change of at least 0.5 percent to make a difference, the bigger your loan balance, the less you need a big interest rate change to save money,” Buege said.

Gilpin said a difference of one-fourth of a percentage point can mean significant savings on a loan balance of $200,000 or more. For balances under that amount, most borrowers would want their rate to be at least one-half of a percentage point lower.

“We’re seeing a lot of people switch from a 30-year loan to a 15-year loan to save on overall interest and pay off their home faster,” Gilpin said. “If someone has been paying on their 30-year loan for six or seven years and they refinance into a 15-year loan, they’re saving eight years of payments.”

Many borrowers are also refinancing from an FHA or conventional loan with mortgage insurance to a conventional loan without private mortgage insurance, Gilpin said.

“Home values have been appreciating quickly this year, so a lot of borrowers are able to save significantly by getting rid of their mortgage insurance with a refinance,” Gilpin said.

Mortgage insurance is required with all FHA loans and on conventional loans with less than 20 percent in home equity.

Improving your cash flow with a lower mortgage rate, eliminating mortgage insurance and shortening your loan term are not the only reasons to refinance. Buege said cash-out refinancing, which refers to borrowing more than your current mortgage balance, is popular for debt consolidation or to pay for a home improvement.

“Like most lenders, we have digital tools on our website that you can use to do the math to check the difference in your monthly [payment] if you refinance,” Parker said. “We provide a closing-cost worksheet before a formal application, so your credit doesn’t get impacted. You can see several options, including monthly payments and closing costs to decide if it makes sense to refinance.”

Approximately 17 million to 18 million homeowners could save as much as 1 percent on their mortgage rate by refinancing, according to the analysis by Ellie Mae. But for each borrower, it’s important to consider a refinance in the context of their long-term financial plan and to work with a lender who can advise them about all the consequences of a refinance.

Refinancing tips

● Consult a lender to review your options. Switching a loan term to 10 or 20 years instead of just 15 or 30 could improve your financial situation.

● Prepare your paperwork. Gather your pay stubs and bank statements physically or digitally to speed up your application process.

● Shop around. Contact your current lender and one or two others on the same day for an accurate comparison.

● Negotiate. If you find a better rate, you can always ask another lender or your current lender to see if they can match it.

● Raise your credit score. Interest rates on conventional loans are tiered according to your FICO score, with the lowest mortgage rates reserved for borrowers with the highest credit scores. Even a small increase in your FICO score could move you to the next level and save on your rate.

● Reduce your debt. A lower debt-to-income ratio, which compares your minimum payment on all debt with your gross monthly income, may make the difference between qualifying for a loan or not but it doesn’t directly impact your mortgage rate. Generally, lenders prefer a debt-to-income ratio of 36 percent or less, but most loans require a ratio of 43 percent or less. Some lenders and loan programs allow a higher debt-to-income ratio.

● Understand what impacts your rate. Your rate may be higher if you have less home equity, you’re refinancing a second home or you’re refinancing a condo.