Are you responsible for paying interest on your mortgage even after you have paid it off in full? When your principle balance reaches zero, does your interest clock stop running?
The answer to these questions has been a shock to many home sellers and refinancers. If your home was financed with a loan insured by the Federal Housing Administration and you pay it off before the loan matures, when you close on the loan, you will be expected to pay a full month’s worth of interest regardless of the day you settle the loan on.
To break this all down: it means that if you either sold your home or refinanced it and closed on August 2, your loan servicer would still charge you interest until August 31. For many homeowners, the additional interest costs them hundreds of dollars. The practice of charging a full month’s worth of interest is unique to the FHA. Freddie Mac, Fannie Mae, and the Department of Veteran Affairs, all stop the collection of their interest payments on the day the principal is paid in full.
Change is coming
This unfair practice that the FHA has been continuously criticized for will soon come to an end. The change is being made due to a regulatory mandate put into place by the Consumer Financial Protection Bureau. After many complaints were made, the FHA agreed to put a stop to the controversial full-month policy, but it only applies to future borrowers. The FHA was given until next January 21 to make the switch in their policy.
While this is great for future buyers, sellers and refinancers, those who already have loans insured by the FHA will not qualify for this deal. Many homeowners will still be hit with the burden of paying additional interest charges.
Why did the change take so long?
It is nice that the FHA has finally decided to change its ways, but it took many years of complaints to get this accomplished. For the past ten years, both homeowners and real estate professionals have stated that the interest payment policy created by the FHA is unfair and gouges unsuspecting homeowners. Many sellers were unaware of the FHA’s policy and, therefore, did not factor in the extra cost of the interest.
In 2004, The National Association of Realtors started to publicly criticize the FHA’s practice of requiring a full month’s worth of interest payments at the end of the loan. They stated that the FHA was responsible for taking tens of millions of unjustified extra dollars from sellers. According to the calculations made by The National Association of Realtors, in 2003, the FHA collected an estimate of $587.4 million dollars worth of interest that was unjustified.
In 2011, complaints finally led to a call for changes in legislation, but the FHA brushed off the critics and the bill requiring changes to be made in their policy went nowhere.
The controversial policy will be changing soon, but if you already have an FHA loan, the changes will not apply to you. The best way to avoid paying extra interest is to make sure you sell or refinance at the end of the month.
For more information about the FHA’s controversial interest policy and any type of loans, contact Maureen Martin.