Millions of homeowners have faced an ongoing dilemma over the
past several years. As interest rates have fallen, the
incentives favoring refinancing your mortgage
have steadily risen. Yet because refinancing typically involves
thousands of dollars in costs for everything from new appraisals
and title insurance to legal fees, it's not a decision that you
can afford to take lightly. And once done, you may find that it's
way too expensive to do
if rates happen to fall further.
All that could change, though, in the near future. If a new
proposal from the
Consumer Financial Protection Bureau
actually becomes a requirement, then refinancing could get a
whole lot easier.
Under the proposed CFPB rule, mortgage lenders would have to
offer an option under which homeowners wouldn't owe any fees.
Under the fee-free option, homeowners or prospective buyers would
be able cut existing up-front closing costs on mortgages
The idea behind the proposal is to make it simpler for people
to understand the loans they're getting and to compare loan
offers from different lenders. Under the current situation,
mortgage borrowers have to consider not only the interest rate
they're getting but also any up-front "points" and origination
fees that banks charge. By leveling the playing field, borrowers
would simply be able to look at the rate each bank offers and
choose the lowest one.
The proposal still allows banks to offer lower interest rates
in exchange for
points or other fees
. In some cases, taking such deals will give homeowners the best
deal over the long run. Yet with so many mortgage loans getting
closed out long before their full periods run, whether because
people move or refinance at better rates, paying points for a
lower rate makes less sense than it may have for past homeowners
who moved around less.
Banks should celebrate
At first glance, you might think top mortgage lenders
Bank of America
) , and
bristle at further regulation
. Yet if you think about it, you might come to the conclusion
that this is actually
news for mortgage lenders.
Consider: Fee-free mortgages already exist. Typically, what
you have to do to get a fee-free mortgage is to accept a higher
interest rate on your mortgage loan. Just as paying points earns
you a lower rate, accepting a higher rate gives you a credit that
you can apply toward closing costs. So under so-called "fee-free"
mortgages, there might well still be fees involved. They'd just
be subsidized by higher rates.
Moreover, reducing the barrier to refinancing would lead to a
huge increase in refinancing activity. Think about it: Any time
an interest rate moved down even slightly, homeowners would have
an incentive to go ahead and pull the trigger on another
refinancing. As long as banks were able to earn
transaction-related income by selling those loans, they'd
from the new rules.
The same goes for other transaction-related companies. For
instance, title insurance company
) could see greater volume as a result of the new rule.
Similarly, private mortgage insurers
) could benefit from increased activity.
Yet the biggest winners would still be consumers. Given how
many homebuyers didn't understand the terms of the loans they got
during the housing boom, just about anything that makes loans
easier to understand is a net positive. And if it helps goose the
home financing market, so much the better.
Feeling at home
For now, the CFPB will go through its normal process of getting
public comments both from banks and customers to weigh any
concerns that either group has about the new proposal. Barring
any controversy, however, the new rules could go into effect as
early as January, bringing a welcome New Year's gift to many
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Fool contributor Dan Caplinger always likes lower costs. He
doesn't own shares of the companies mentioned in this article.
The Motley Fool owns shares of Wells Fargo, Bank of America,
JPMorgan Chase, and Fidelity National Financial. Motley Fool
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