Adverse Market Refinancing Fee

The plunge in interest rates in the wake of the pandemic offered homeowners yet another opportunity to refinance their mortgages. They have been, in record numbers. The cost of refinancing will now be getting more expensive with the implementation of the Federal Housing Financing Agency's (FHFA) "Adverse Market Refinancing Fee."

All refinances backed by Fannie Mae and Freddie Mac (~70 percent of all mortgages), which the FHFA oversees, will be subject to the Adverse Market Refinance Fee, equivalent to 0.5 percent of the total loan amount. The fee is intended to help cover at least $6 billion of projected losses incurred by the Covid-19 crisis, the FHFA said in an August statement. Originally slated to go into effect on September 1, it was pushed back until December 1st due to the dislocations in the economy.

The fee actually will be charged directly to lenders by the FHFA, who will then most likely pass it on to customers. The way in which borrowers will get charged might differ from lender to lender. For example, lenders might tack the fee onto the closing costs, add it to the loan amount or raise the interest rate. Since the fee is 0.5 percent, lenders will be looking to recoup $500 for every $100,000 lent out.

There are some borrowers who will escape the new fee, including those whose loans are $125,000 or less, "nearly half of which are comprised of lower income borrowers at or below 80 percent of area median income," according to the FHFA. On the other end of the spectrum, jumbo mortgages, which are loans over $510,400, will not be required to pay the fee.

Additionally, lenders that don't sell their loans, also known as a direct lender or a portfolio lender, won't be charged the fee, which can put them (and their customers) at an advantage.

However it gets paid, whether built into the rate or the amount borrowed, it is just another piece of the equation of determining if a refinancing makes financial sense.

Residence vs. Domicile

When the pandemic and subsequent quarantine struck earlier this year, a lot of city dwellers escaped to vacation areas and more rural environs. As two months became four months, and is now extending through the end of the year, many are asking if they can change residency to their current location and avoid paying income tax back in their home state.

It's not that easy. The key concept is the difference between residence and domicile.

Every state that has an income tax follows the concept of a taxpayer's domicile. The domicile concept is that you can only have one domicile. It's your principal, primary home, the place you intend to return to when away. You can have ten residences across the country or across the world, but you can have only one domicile.

To change your domicile you need to have intention. Residence without intention in any location doesn't change your domicile. Even if you expected to stay there two years but ended up staying ten, it still wouldn't be your domicile. If you have an intent to remain indefinitely and you're there, you can still go back to where you came from.

It is confusing. You definitely want to work with a CPA or tax attorney to get it right. Otherwise, you may find yourself in a situation where two states are coming after you for income tax.

One other situation that could come up for someone headed for the hills is that many states want you to file a return for income earned while working there. In fact, 24 states require a nonresident employee to file a tax return if they've worked only one day in the state. However, in a world where you need only a laptop and an internet connection to be up and running, this is one that you should be able to avoid.

Time to Refinance?

The main reason the Federal Reserve lowers rates in reaction to an economic shock is that interest rates are the price of money. The lower the interest rates, the more people and businesses will borrow and spend, turning the wheels of the economy. The biggest ongoing expense most people have is their mortgage, and if you haven't looked at refinancing your existing loan in a while, the time is now.

Lowering your monthly payment is the number one reason to refinance, and rates have rarely been lower. Additionally, if your current mortgage has an adjustable rate, it would be prudent to switch it to a fixed-rate loan.

From a financial planning standpoint, if your current payment fits into your budget with-year mortgage, shorten the new loan into a 20-, or even 15-year term. That would save thousands in the years ahead.

The last reason to refinance is to take cash out of your home. If the value of the home has increased since you purchased it, or if you've paid down a chunk of the mortgage already, you could take out a new loan, pay off the old one, and have cash left over. You might use the extra money borrowed to pay off higher-cost debt, cover the kids' college costs or remodel your home. Just be careful that you don't get back into that same higher-cost debt again while having given up the equity you'd built up.