The Cost of Buying a Second Home is Set to Increase

As the holidays are now behind us, and winter is in full effect here in West Michigan, now is about the time people begin dreaming of the warm days of summer, and with that, the prospect of owning a home on or near one of our amazing lakes.

Grand Haven Waterfront Real Estate
Grand Haven Real Estate

Whether it’s Lake Michigan, Spring Lake, Lake Macatawa to name a few, it seems it’s getting a little more expensive to take out a mortgage. This week, Freddie Mac said the average interest on a 30-year fixed-rate mortgage crept up to 3.22% — still very low. But this time last year, that rate was a record-low 2.65%.  If you were on the fence before, it might be time to take the dive and purchase before April 1, as that is when the increase is set to take effect.

Who will be impacted?

The pricing increases target borrowers applying for conventional high balance loans and those for second properties. 

For perspective, conventional mortgages account for about 64% of home purchase loans, according to the National Association of Realtors.

High balance mortgages are any that have a balance above the baseline conforming loan limit — $647,200 in 2022 for about 95% of the U.S. 

And a second home is any property you’ll live in part-time, but that won’t be your primary residence. 

For those in the market for a second home, costs are going up even more, thanks to higher fees coming in a few months.

Demand for second homes has gone through the roof in the last couple of years, as newly remote workers seek more space and better scenery.    

It’s not just the pandemic, said Daryl Fairweather, chief economist at Redfin.

“There is a long-term trend that we’ve seen of second-home purchases increasing,” she said. “I think part of that just goes along with wealth inequality in the rich getting richer and being able to buy more second homes.”

Soon, they’ll have to pay a little more for those homes. This week, the Federal Housing Finance Agency announced it’s increasing the upfront fees for second-home loans sold to Fannie Mae and Freddie Mac by as much as about 3.9% starting in April.

Why is FHFA raising fees on high-balance and vacation home loans?

The FHFA made the fee adjustments in order to facilitate “equitable and sustainable access to homeownership” while improving Fannie and Freddie’s “regulatory capital position over time,” FHFA Acting Director Sandra L. Thompson said.

Basically, that means the new fees will bolster FHFA’s cash reserves.  

The fees are also a way to help first-time home buyers and borrowers with low- and moderate-income get access to credit. First-time homebuyers in high cost areas with incomes at or below their area median income will be exempt from the fees.

The newly raised fees “should provide an opportunity for the government-sponsored enterprises (GSEs) to lower fees on the mission-centric portions of their businesses that primarily serve first-time and low- to moderate-income borrowers,” according to Mortgage Bankers Association President and CEO Robert Broeksmit.

Both fee hikes will go into effect on Apr. 1. 

How much are the new conforming loan fees?

The upfront fees for high balance loans bought by the GSEs will increase on a tiered scale between 0.25% and 0.75%, depending on loan-to-value ratio.

Upfront fees for second home loans will increase between 1.125% and 3.875%, also tiered and dependent on loan-to-value ratio.

How much of the new fees lenders absorb and how much they pass to the borrower will be up to the lender.

“It’s hard to model how much, but [the new fees] unequivocally mean higher rates”

In this scenario, lenders will likely inflate the mortgage rate they offer on these types of loans to offset their new incurred cost. 

“It’s hard to model how much, but it unequivocally means higher rates. That’s how it works,” according to a community lending expert.

However, if the lender knows they’ll be able to execute the loan sale to Fannie or Freddie before the new fees go into play, they won’t have to price it up, the expert continued. 

Redfin estimates that’ll cost a typical buyer an extra $13,500 on a $400,000 home. Fairweather said regulators may be trying to get a handle on what could be an emerging bubble in the housing market.

“If a whole lot of people are buying up second homes with the belief that it’s a great investment because the value will only go up, that can turn into bubble behavior,” she said.

Fees will also go up on certain high-balance loans with exceptions for first-time buyers. Fannie and Freddie have a mission to help make homeownership more affordable, said Guy Cecala with Inside Mortgage Finance.

Propping up the market for second homes isn’t exactly helping.

“They should be focusing their resources on low- and moderate-income borrowers, and that’s the reason for doing it,” he said.

Demand for second homes is likely to remain high, according to Dean Tucker, a mortgage broker in Boise, Idaho.

“I don’t think that it’s going to slow that market down. Second homebuyers are typically more affluent,” he said. “And if that’s the cost of getting a second home, that’s the cost.”

Apply before costs rise

If you’re considering taking out a loan above the baseline conforming limit or purchasing a second home, two factors should push you to act fast: the FHFA’s fee increase and expected rising interest rates for 2022

The FHFA set the date of Apr. 1 for the fee hikes “in order to minimize market and pipeline disruption,” according to its press release. 

Getting in before the new fees take effect will come down to individual loan characteristics and how long it takes from application to delivery. Giving your lender as much lead time as possible will likely help everyone involved.  

“If it’s a purchase transaction, consumers should be very conscious of the contract settlement date,” said Allied Mortgage Group COO Kyle Manseau. 

“And ideally, the industry and lenders need a little bit of buffer from the time a loan funds, to post-close, to prep it for delivery to the GSEs — generally a week or so. Realistically, we’re looking at 30 to 40 days.”

With that buffer period in mind, submitting your application around two months before Apr. 1 to allow for the regular processing time could help you avoid the new fees.

If you’re looking at either a high balance loan or a mortgage for a second home, there’s no time like the present to lock in a low rate.

All is not lost, however, for properties in Michigan, my trusted lending partner Dan Moralez has a fixed rate option where the increase will not be applicable.  “A super aggressive product and the rates will be way lower than what clients can get in most places.  With this product there is no price adjustment for second homes in Michigan only.  Does not apply to other states” says Dan. 

Buyers can always borrow in the private market. And a lot of them don’t even need a mortgage — they pay cash.

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