The FHA loan, commonly called “the first time home buyer loan” because of its low down payment, has been charging a prepayment penalty when the home owner sells or refinances.
How the Prepayment Penalty Works
Regardless of the day your FHA loan ends, you have to pay interest on the loan through the end of the month. This means if your refinance or sale closes on the 10th of the month, FHA keeps on charging you for the additional 20 to 21 days till month-end. This is considered to be a prepayment penalty.
Prepayment Penalties Have Been Hidden
Near the bottom of the Truth-in-Lending Disclosure, it says:
Prepayment: If you pay off early, you
may or will not have to pay a penalty
The lender checks the box next to may or will not. Most lenders check the box for will not, thinking that the FHA prepayment penalty is not like the sub-prime prepayment penalties. But the FHA does have a prepayment penalty, and the may box should be checked accordingly.
Thus, most home owners with a FHA loan have had their prepayment penalty hidden from them.
FHA Will Discontinue Prepayment Penalties
The good news is that for loans that close on January 21, 2015 or later, there will be no prepayment penalty, regardless of when you refinance or close on your sold property.
For everyone who already has an FHA loan, you’ll want to time the closing of your next loan to be on the last day of the month to avoid paying extra interest.
Carolyn, I always look forward to your posts because they are so practical and informative! I was just in a discussion a couple days ago with someone about the pre-payment penalty! If they decide to move forward with a refinance or a second mortgage, I will send them you way for a consultation.
Thank you, Traci. I appreciate your kind compliment, and I always look forward to helping people save money on their financing.