Beware of the Hidden Prepayment Penalty!

FHA loans — the first-time home buyer loans with only 3.5% down payment — have a hidden prepayment penalty that could cost you hundreds of dollars when you sell or refinance.

If you used an FHA loan (3.5% down payment) when you bought your house, get out the Truth-in-Lending form. Near the bottom, you’ll find in bold Prepayment Penalty. Is the box checked for may have or for will not have a prepayment penalty? Regardless of which box is checked, if you close your loan on any day of the month except for the last day, you will pay a penalty.

Question: “Can they do that? My documents says I will not have a prepayment penalty!”

Answer: Yes they can, and I guarantee you that they will. If you pay off your mortgage in the middle of the month, FHA will charge you interest for the entire month, no matter when you vacate the loan. So essentially, you are paying FHA extra interest payments even after the loan is closed. This is a prepayment penalty.

How They Keep It Hidden

When they calculate the pay-off balance on an FHA loan, they roll in those extra days of interest on what you owe. If you wonder why your pay-off figure seems too high, the FHA prepayment penalty could explain it.

How to Avoid the Prepayment Penalty

If you have an FHA loan, you need to close on the last day of the month. If that is not possible, close as near to the last day as you can in order to minimize your financial penalty.

FHA is Making Millions on Hidden Prepayment Penalties

In just one year alone (2003), FHA pocketed an extra $587,400,000 in profit from home sellers’ prepayment penalties. Over the course of the last decade, that multiplies to billions of dollars charged to unsuspecting first time home sellers and home owners refinancing.

Stop the Madness!

In 2011, U.S. Senator Ben Cardin (MD-D) tried to pass a bill stopping FHA’s prepayment penalty. Unfortunately, FHA poo-pooed the bill and it failed to pass.

Now the Consumer Financial Protection Bureau (CFPB) is pressuring FHA to stop the penalty. They say it’s not fair, and they want FHA to knock it off.

FHA is Fighting Back

FHA says if they are forced to drop the penalty, then new borrowers “can expect to pay a slightly higher rate.”

Thanks a lot FHA. Now you’re going to charge ALL home buyers at the beginning of the process instead of only the ones who don’t close at the end of the month?

New Policy Won’t Affect Existing Home Owners

If the new policy passes — and I think it will — it won’t affect current home owners. The existing loans will still be subject to the financial penalty. So be vigilant about your closing date. Make sure you close at the end of the month to avoid the paying extra.