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Why Are Refi Rates Higher Than Purchase Rates? Can Borrowers In Forbearance Refi – Yes & No

A couple sits by the window in their living room as they discuss their refinance options for their home.

I blogged Monday about our Refinance FAQs, and it is already one of our most frequently viewed web pages – indicating how badly borrowers wanted this information.

So, I once again recommend sharing this info with friends, family and clients.

I received a lot of feedback from the blog too and am highlighting two questions that either should have been in the FAQs initially or that need to be updated.

WHY ARE REFINANCE INTEREST RATES OFTEN HIGHER THAN PURCHASE INTEREST RATES?

Refinances are associated with slightly more risk than purchases from both a default and a fallout perspective – so lenders sometimes charge slightly higher rates to account for the extra risk.

More significantly though, refinances are often quoted as “no cost” loans while purchases are rarely quoted as “no cost” loans – and “no cost” loans necessitate slightly higher rates.

Purchases are rarely quoted as no cost loans because purchase closing costs tend to be much higher and because lenders have much less control over them.

Lenders often quote refinances as “no cost” loans for several reasons: (1) refinancing closing costs are much lower; (2) lenders have far more control over refinancing closing costs; and (3) no cost refinances are often more enticing for borrowers.

Refinancing closing costs, however, can still easily approach $4,000 so lenders are forced to quote slightly higher rates in order to generate more “yield premium” or commission that they can then use to cover those closing costs.

If a well-qualified refinance borrower wants to pay all of her closing costs (instead of opting for a no cost loan), her interest rate would likely be very close to or the same as the prevailing purchase money mortgage interest rate.

CAN BORROWERS IN FORBEARANCE STILL REFINANCE?

The answer is – it depends, as the rules just changed.

On May 19, 2020, the FHFA came out with new guidelines for “conforming loans” or loans backed by Fannie Mae and Freddie Mac.

If a borrower has had her forbearance authorized by her servicer but is still making timely mortgage payments, she will still be allowed to refinance (or finance a new purchase) even though she is technically “in forbearance.”

If a borrower is formally in forbearance and not making payments, she will not be able to refinance (or finance a new purchase) until her forbearance has ended and she has made at least three timely payments in accordance with her repayment plan. (she does not need to repay her unpaid balances though, as previously thought)

In other words, to quote FHFA Director Mark Calabria, “Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized.”

For jumbo loans and other loans that fall outside of “conforming” or Fannie Mae and Freddie Mac guidelines, the repercussions of forbearance will be more severe.

These borrowers will likely not be able to refinance until they are out of forbearance and their deferred balances have been repaid.

A major risk of forbearance for borrowers, particularly if payments are actually missed, is the possibility of missing out on a fantastic refinance opportunity while rates are very low.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167