Refi’ing a FHA loan? Make sure your lender knows the rules
For all the benefits of FHA loans (i.e. low interest rates, low down payment requirements, assumability) there are also drawbacks (i.e. extensive paperwork requirements, upfront mortgage insurance premiums, etc.).
When it comes to refinancing an existing FHA mortgage homeowners need to be aware that one of the drawbacks is that FHA loans require a full 30-day pay-off no matter when a loan is refinanced. Why is this a drawback?
Let me illustrate. Let’s assume that a homeowner has a $200,000 FHA loan which is a fixed rate @ 6.50%. On the 15th of any given month they look into refinancing an determine that they can refinance into a new fixed rate @ 5.50% if they lock for 30 days. If they lock and proceed with their loan application they would fund their new loan on the 15th of the following month.
If their existing loan was a non-FHA loan then at closing their existing lender would collect 15 days worth of interest (1st-15th or $541.67) and the new lender would collect 16 days of interest (15th-31st or $458.33). The total amount of interest collected at closing would be $1,000.01.
However, because their existing loan is a FHA loan then the existing lender would actually need to collect interest for the entire month. Therefore, when these homeowners go to close they would find that the existing lender was collecting interest for the entire month (1st-31st or $1,083.34). Meanwhile, the new lender would still collect interest for 16 days (15th-31st or $458.33). Therefore, the total amount of interest collected at closing is $1,541.67. In essence, the fact that the existing loan is a FHA loan adds $541.66 to the closing costs.
A homeowner with a FHA loan can mitigate the additional expense by ALWAYS CLOSING ON FHA REFINANCES ON OR NEAR THE LAST DAY OF THE MONTH. IF they are working with an experienced and knowledgeable mortgage professional they should account for this when advising whether or not it makes sense to refinance.
If you’d like a no obligation refinance analysis completed for your FHA loan please click on the “Work with Evan” tab to the left.