Make us your home page
Instagram

To save money on FHA loan closing, timing is everything

Timing is everything in settling FHA loan

WASHINGTON — Could the federal government's booming FHA mortgage program be forcing homeowners to pay tens of millions of dollars of extra interest charges when they sell their houses or refinance their loans?

Critics say yes. The government says the critics aren't providing the full picture.

Those critics include Sen. Ben Cardin, D-Md., who is sponsoring legislation that would prohibit FHA lenders from collecting a full month's worth of interest from sellers and refinancers who pay off their mortgages — go to settlement — before the final day of the month.

No other major source of financing — not Fannie Mae, Freddie Mac or even the VA — requires interest payments from borrowers beyond the date they pay off their loans. On an FHA loan, however, if you sell your house and go to closing early in the month, you are charged interest through the rest of the month.

Say you pay off a $200,000 FHA-insured mortgage on the fifth day of April. You'll be charged an extra $820 to cover interest for the remaining days of the month, according to estimates prepared by the National Association of Realtors, which supports Cardin's bill. If you pay off the same loan on April 15, the additional interest levy would total $492.

Where does the money go? Ted Tozer, president of the Government National Mortgage Association, which bundles FHA loans into bonds and sells them to investors, says it flows to the bondholders, who are guaranteed payment of interest for the full month even if the balance is paid off much earlier.

Tozer maintains that the direct payment approach has afforded FHA borrowers a slight discount — 0.10 percent to 0.15 percent — on their initial interest rates. But critics charge that the extra interest greatly exceeds that barely perceptible rate break.

"This is an issue of fairness," says Cardin. "Homeowners should not have to pay interest on loans that they have fully repaid." His bill, the Reduce Excessive Payments Act, would prohibit the practice and require FHA lenders to compute payoffs on a per-diem basis rather than a full-month basis.

The National Association of Realtors says the out-of-pocket costs to unwary consumers are huge. Citing the most recent statistics on early payoffs it claims it could obtain from FHA, the group says that during 2003 alone:

• FHA borrowers paid $587.4 million in "excess interest fees" because of the full-month rule.

• Only 16 percent of loans were prepaid during the final five days of the month.

• The average "excess interest" payment from borrowers to lenders and investors was $528, but 425,000 homeowners paid an average $622 in extra fees.

Between January 2000 and January 2004, according to the Realtors' analysis of FHA data, borrowers paid more than $1.375 billion in excessive interest. The corresponding amounts today could be significantly higher since FHA has a much larger market share.

Asked for comment, Vicki Bott, who heads FHA's single-family mortgage office, acknowledged the controversy and said the agency is "examining this issue very closely."

In an interview, Tozer said the entire issue is up to FHA, and that his agency could readily sell its mortgage-backed bonds using the per-diem payoff approach that is standard in the conventional mortgage marketplace. But investors would still need to be compensated for the full month's worth of interest, he said, and that would probably require a slightly higher rate on the mortgage.

Where's this headed? With pressure coming from Congress — notably from an influential Democrat who tends to be supportive of the Obama administration's policies — FHA may move off its disputed practice.

In the meantime: If you have an FHA loan and plan to refinance or sell your house, try hard to schedule the closing at the end of the month. You could save a bundle.

Kenneth R. Harney can be reached at [email protected]

To save money on FHA loan closing, timing is everything 04/02/11 [Last modified: Saturday, April 2, 2011 4:30am]
Photo reprints | Article reprints

Copyright: For copyright information, please check with the distributor of this item, Special to the Times.
    

Join the discussion: Click to view comments, add yours

Loading...
  1. Massachusetts firm buys Tampa's Element apartment tower

    Real Estate

    TAMPA — Downtown Tampa's Element apartment tower sold this week to a Massachusetts-based real estate investment company that plans to upgrade the skyscraper's amenities and operate it long-term as a rental community.

    The Element apartment high-rise at 808 N Franklin St. in downtown Tampa has been sold to a Northland Investment Corp., a Massachusetts-based real estate investment company. JIM DAMASKE  |  Times
  2. New York town approves Legoland proposal

    News

    GOSHEN, N.Y. — New York is one step closer to a Lego dreamland. Goshen, a small town about fifty miles northwest of the Big Apple, has approved the site plan for a $500 million Legoland amusement park.

    A small New York town, Goshen approved the site plan for a $500 million Legoland amusement park. Legoland Florida is in Winter Haven. [Times file  photo]
  3. Jordan Park to get $20 million makeover and new senior housing

    Real Estate

    By WAVENEY ANN MOORE

    Times Staff Writer

    ST. PETERSBURG —The St. Petersburg Housing Authority, which bought back the troubled Jordan Park public housing complex this year, plans to spend about $20 million to improve the 237-unit property and construct a new three-story building for …

    Jordan Park, the historic public housing complex, is back in the hands of the St. Petersburg Housing Authority. The agency is working to improve the 237-unit complex. But the latest plan to build a new three-story building for seniors will mean 31 families have to find new homes. [LARA CERRI   |   Tampa Bay Times]
  4. Coming soon at two Tampa Bay area hospitals: a cancer treatment that could replace chemo

    Health

    A new cancer treatment that could eventually replace chemotherapy and bone marrow transplants — along with their debilitating side effects — soon will be offered at two of Tampa Bay's top-tier hospitals.

    Dr. Frederick Locke at Moffitt Cancer Center in Tampa is a principal investigator for an experimental therapy that retrains white blood cells in the body's immune system to fight cancer cells. The U.S. Food and Drug Administration approved these so-called "CAR-T" treatments for adults this month. In trials, 82 percent of cases responded well to the treatment, and 44 percent are still in remission at least eight months later, Locke said. [CHRIS URSO   |   Times]
  5. Regulator blasts Wells Fargo for deceptive auto insurance program

    Banking

    Wells Fargo engaged in unfair and deceptive practices, failed to properly manage risks and hasn't set aside enough money to pay back the customers it harmed, according to a confidential report by federal regulators.

    Wells Fargo engaged in unfair and deceptive practices, failed to properly manage risks and hasn't set aside enough money to pay back the customers it harmed, according to a confidential report by federal regulators.
[Photo by Spencer Platt/Getty Images, 2017]