CNBC is reporting a breaking story from the mortgage industry, and it is major. Fannie Mae and Freddie Mac, the government’s federally backed mortgage companies, are rolling out new mortgage refi programs with the ambitious goal of helping low and moderate income households gain access to the same historically low interest rates that high credit borrowers are eligible for.
For borrowers with incomes below the median, or average income, this means they will now qualify for rates which are currently between 2 and 3 percent as long as they meet some other basic requirements.
With the average rate on a 30 year fixed rate mortgage sitting at 2.78% (per Zillow), this new program from Freddie and Fannie should provide a major boon to low and median income homeowners.
Here’s How It Works
Let’s take the example of a homeowner currently paying an interest rate of 4.25% on their $240,000 mortgage. If this homeowner were to refinance into a rate of 3.25%, they could easily be looking at $150 in savings each month. Now if that rate drops half a percentage point or even a full percentage point under that, those savings could nearly double, approaching $300 per month in savings. That’s $3,600 less in mortgage payments each year, which is nothing to sneeze at. If your loan amount is higher than that $240,000 mark, your savings will be even greater.
There are a couple of mortgage rate comparison platforms out there that we’d recommend highly, as if you choose the right one, you could easily be looking at saving a few thousand dollars a year, or more, by refinancing your mortgage now. These platforms can help everyone, and if you are currently bringing in a moderate or even low income, you could still qualify for rates in that two to three percent window.
Fannie Mae is helping to make it happen. This past summer, the federally backed mortgage company rolled out a program which increased income limits and loosened requirements to expand refinance options to more homeowners. Freddie Mac has jumped in the fray as well, making right now arguably the best time ever to refinance your mortgage.
More Refinances for More Homeowners, Nationwide
These are welcome changes from Fannie and Freddie. Their programs are expanding the population that is eligible for these historically low refi rates, and making the entire process much easier for homeowners from every walk of life.
According to Freddie Mac, as mortgage rates dropped to historic lows in 2020, refinance activity clocked in at $2.6 trillion last year. That number is the highest annual mark since 2003, a year that saw $3.9 trillion in refinance transactions.
Zillow is reporting current 30 year fixed rate loan averages of 2.78%, which is markedly lower than 2018’s average, just three years ago, of 4.54%. In 2008 that average interest rate stood at 6.03%. And this is why refinancing now makes sense. The clock is ticking on these historically low rates, and with Fannie and Freddie loosening requirements so more homeowners can take advantage of the sub three percent numbers, the time is now to refi. Because these rates likely will skyrocket in the coming months.
The FHFA Chimes In
Last year saw a major refinance boom, yet, despite that, for homeowners with below average annual incomes, refinance activity actually fell. Sandra Thompson, the acting director of the Federal Housing Finance Agency (FHFA), put it like this: “These borrowers risk being left on the sidelines during a generational opportunity to lock in more sustainable monthly payments. And these are often the very people who could most benefit from adding breathing room to their budget.”
Some larger banks have been slow to participate in Fannie and Freddie’s new programs. But if you’re currently living in the home you’re looking to refinance, meaning it’s your primary residence, and your mortgage is backed by Fannie or Freddie, you should be good to go.
Again, even low income households, or borrowers with incomes below the median, will qualify for these new refinance programs as long as they meet some other basic requirements. At the program’s inception, the income limit was 80% of the local median amount. But Freddie Mac is set to raise that limit in Q1 of 2022.
Loosened Requirements Means Easier Refinances for All
Another requirement getting tossed in the dustbin of history is the mortgage loan having to be less than 10 years old. Now, even if your mortgage was written over 10 years ago, you can still qualify for these historically low refi rates, per Fannie and Freddie’s new programs.
A specific closing costs cap was also eliminated, and payment reduction can now be any amount, meaning there is no minimum requirement for that any more. Mortgage lenders must now offer a 50 basis point rate cut (meaning a half of a percentage point).
Homeowners who have taken care of any Covid-related missed mortgage payments also qualify for these new programs. Prior to the new programs and rules, if you had missed any payments in the past six months, or more than one in the past twelve months, you couldn’t qualify. But now you can. The loosening of those guidelines is a major boon to homeowners looking to refinance into rates under three percent.
Finally, qualifying homeowners should try to have a debt-to income ratio, or DTI, under 65%. Credit scores need to be at 620 and above to qualify for the new programs, but these requirements are continuing to get loosened as well. To see if you qualify for these new programs, simply run a refi quote comparison with participating lenders. It only takes a few short minutes and you could be well on your way to saving thousands of dollars this year.