Do you recall all of the bickering in Washington, DC at the end of 2011 regarding the extension of the payroll tax cut? The issue revolved around extension of a two percentage point tax cut that was set to expire on Dec. 31st. Eight days before its expiration, Congress managed to approve the extension by passing the Temporary Payroll Tax Cut Continuation Act, which grants an additional 60 days of the reduced payroll tax rate (in hopes that a more permanent rate cut can be achieved in the next 2 months). Lost, however, in all of the partisan bickering was one of the methods of payment for the tax cut: and increase to the guaranty fees charged by Fannie Mae and Freddie Mac on loans purchased by these agencies on or after April 1, 2012.
The new law mandates a minimum guaranty fee increase of 10 basis points, or 0.10%. This fee increase will be passed through to the consumer and will likely result in loan prices going up by 0.4% to 0.8%. To clarify, if loan prices go up by 0.4%-0.8%, this represents an increase to the discount points charged, not the interest rate offered. However, borrowers may opt to accept a slightly higher interest rate to absorb this fee increase instead of coming out of pocket to pay more in closing costs.
What does this mean for someone that is considering a refinance or a home purchase? Well, if they can, they should act now and lock in today’s rates before the new “g-fee” kicks in with all lenders. Some of the big boys (Wells Fargo, Chase, etc.) are already phasing in the increase since they typically take up to 60 days to process loans. More efficient mortgage companies may have another week or two before they’ll have to increase their pricing, but it won’t be long until everyone is on a level playing field. What remains to be seen is how each lender incorporates the new fee into their pricing. Currently, Wells Fargo is on the high end with a 0.80% increase to their pricing, while other lenders are coming in closer to 0.40%.
Finally, realize that the increased g-fee will be with us for a while, too. The new law requires it to remain elevated through Oct. 1, 2012. While interest rates in general are not expected to increase much in the year ahead, the impact of the payroll tax cut extension will make it more expensive to obtain a mortgage backed by Fannie Mae or Freddie Mac.
Since there is a time lag between the closing of a loan and its eventual purchase by Fannie or Freddie, lenders are starting to roll out the fee increase this week.
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