Higher mortgage fees coming in November

Hands holding a house

The fees consumers pay for home loans backed by two government-owned firms will increase this fall, adding about a tenth of a percentage point to the cost of a mortgage.

The fee increase on loans guaranteed by Fannie Mae and Freddie Mac, which will be charged to lenders but likely passed to consumers, could be offset if the Federal Reserve continues to put downward pressure on interest rates as it has been doing since late 2008.

Fannie and Freddie guarantee about half of the home loans in the United States. The fee increase applies only to new loans.

With today's historically low interest rates, a slight increase won't make a huge difference in your monthly mortgage payment. But it will add up over the life of the loan.

For example, adding a tenth of a percentage point to the average 30-year, fixed-rate loan would add about $6 to the monthly payment for every $100,000 borrowed. That's a difference of more than $2,000 over 30 years.

How much borrowers will have to pay in guarantee fees varies.

Borrowers who opted for 15-year, fixed-rate loans paid the lowest average guarantee fee in 2011 (22 basis points), while borrowers taking 30-year, fixed rate loans paid 28 basis points and ARM borrowers paid 30 basis points, Federal Housing Finance Agency data show. A basis point is one one-hundredth of a percentage point.

The new fee increase, scheduled to start for some loans as early as Nov. 1, is aimed at making government-backed loans more expensive, which FHFA hopes will lure private investors back into the market.

Private investors compete with Fannie Mae and Freddie Mac, so when Fannie and Freddie raise prices, private investors can charge more and, theoretically, make a higher profit.

Fannie and Freddie continue to buy loans in all areas of the country and in all market conditions, while private companies enter and exit individual markets in response to economic and housing market conditions.

“These (fee) changes will move Fannie Mae and Freddie Mac pricing closer to the level one might expect to see if mortgage credit risk was borne solely by private capital,” said Edward J. DeMarco, acting director of FHFA.

That’s unlikely to happen, says Guy Cecala, publisher of Inside Mortgage Finance, because the fee increase isn’t large enough.

Private investors fled the market when home prices crashed and have not fully returned, leaving Fannie Mae, Freddie Mac, the Federal Housing Administration, the Veterans Administration and the U.S. Department of Agriculture as the predominate purchasers of home loans.