Tricky and unfair costs marred the refinancing of my FHA loan -- and lots of other mortgages, too
As if the high up-front and monthly mortgage insurance premiums weren't enough, the Federal Housing Administration has been systematically overcharging borrowers at the closing table when they refinance an FHA loan.
That has occurred whether it's an FHA to FHA refinance (called a streamline refinance) or an FHA to conventional refinance.
Even savvy borrowers like me weren't aware of what was happening.
I didn't notice it the first time I refinanced my FHA loan. With so many closing costs, it's always hard to tell what's going where.
I did notice it the second time, when my refinance was much simpler, thanks to switching to a conventional loan, but I couldn't explain what had happened until a recent interview source tipped me off.
Joe Parsons, a senior loan officer with PFS Funding in Dublin, California, pointed me to a post he’d written on his blog, The Mortgage Insider, about a sneaky additional cost of FHA loans.
Parsons helped me figure out why I appeared to have overpaid on certain closing costs the FHA charged me.
The first was interest. My loan closed a few days before the end of the month. Instead of paying interest for the number of days I actually had my FHA loan, I paid interest for the entire month.
That cost me about $180.
The second was monthly FHA mortgage insurance premiums.
I had to pony up two months' worth of extra MIPs at closing, seemingly for months when I would no longer have my FHA mortgage. That cost me another $300.
I assumed that my old lender who serviced my FHA loan had made a mistake in calculating these charges, so I wrote a letter asking for a refund.
The lender sent me a poorly designed escrow account statement that failed to clarify anything.
I sent another letter.
I got an actual letter back the second time, but I was still confused by the response.
Based on my own experience and what I've heard, even those who work in the mortgage industry don't always understand what's going on. There are just too many rules.
So I gave up. I'm self-employed, and sometimes my time is better spent doing more work than chasing lost money.
But a recent press release from the Department of Housing and Urban Development sheds light on what's been going on and says things are going to change soon.
"Borrowers who prepay their FHA-insured mortgages will not have to make interest payments beyond the date their mortgage is paid in full," it says.
This change applies to FHA loans that are paid off on or after January 21, 2015.
Until then, if you refinance an FHA loan, tell your lender at the beginning of the refinance process that you insist on closing on the last day of the month.
Of course, you wouldn't want to be so adamant that you lost out on the best possible interest rate.
But all else being equal, you should try to avoid paying unnecessary interest to the FHA.
Suppose you owe $300,000 on your 30-year, fixed-rate FHA loan that has a 4.0% rate. Right now, if you refinance out of that loan on the first of the month, you’ll still pay a full month’s worth of interest on the loan.
That’s $1,000 in interest for a loan you no longer have, and $1,000 you wouldn’t have to pay if you were refinancing a conventional loan. What a raw deal.
Unfortunately, the new rule doesn't address the excessive charge for mortgage insurance.
“Every FHA loan I have paid off has had two months of MI paid,” Parsons says.
MIPs are paid in arrears, like mortgage interest, so it makes sense that you'd pay one extra monthly mortgage insurance payment at closing — though it should be prorated, like interest.
The second mortgage insurance payment is just a shameless money grab — and one you probably can't do anything about.