What You Need to Know about the FHA Prepayment Penalty Elimination

News that the Federal Housing Association (FHA) will permanently end their prepayment penalty next year has been widely reported and well received by FHA loan homeowners everywhere. FHA loans have served as a major source of financing for moderate-income first-time buyers and thanks to the policy switch made final last week, borrowers will no longer have a prepayment penalty at closing. Here’s what you need to know about the FHA prepayment penalty elimination.

For years, FHA borrowers have had to pay interest rate costs on their loans regardless of the closing date. This means buyers who paid off their loan on January 1st would still be required to pay interest payments for the entire month of January. This practice, which has been affect for years, has cost consumers hundreds of dollars in punitive interest rate charges. It’s estimated that borrowers have paid prepayment penalty charges that range in the hundreds of millions of dollars a year especially during periods when mortgage rates were high. The National Association of Realtors (NAR) reported that during 2003 alone, sellers and refinancers were forced to pay nearly $690 million in extra interest charges.

However, beginning January 21, 2015 new FHA mortgages will require lenders to collect interest only on the balance remaining on the date of closing for a home sale or refinancing. Under the revised policy, if you’re selling your home and you have a $150,000 balance left on your FHA loan, the lender will have to stop charging you interest on the date of the closing, not compute the interest charges that would be due through the end of the month and roll them into your bottom line.

If you are closing on a home prior to this FHA prepayment penalty elimination borrowers should try to schedule an early payoff or closing as late in the month as possible to avoid extra interest charges.

If you’d like more information about the FHA prepayment penalty elimination or would like to know how to qualify for a home loan in your area, please contact the Russo Team today. - Frank


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