WASHINGTON – Aug. 27, 2014 – Last week the Federal Housing Administration (FHA) announced that borrowers who prepay their FHA-insured mortgages will not have to make interest payments beyond the date their mortgage is paid in full. It’s about time they amended the policy.
Currently, anyone with an FHA loan would be on the hook for a full final month of interest no matter what day of the month the loan was paid off on. Only FHA loans are allowed to do this and it is more or less a penalty imposed on the borrower. This is great news for FHA borrowers who are looking to refinance out of their current FHA loan and into a Conventional loan. If the home has appreciated enough to give them 20%+ equity then the new Conventional loan will not have any mortgage insurance, another negative feature FHA loans do not allow for.
FHA’s rule, Handling Prepayments: Eliminating Post-Payment Interest Charges, applies for FHA-insured mortgages closed on or after Jan. 21, 2015. This rule explicitly prohibits lenders from charging borrowers post settlement interest, which is broadly defined as a “prepayment penalty” by the Consumer Financial Protection Bureau (CFPB), for all FHA Single Family mortgage products and programs.