FHA Refinance Borrowers Can Now Close Any Day of the Month
FHA refinance savings keep piling up in 2015.
First, FHA mortgage rates dropped to levels not seen since 2013. Then FHA reduced its high mortgage insurance premiums by 35%.
Now, FHA has eliminated a controversial rule that penalized FHA refinance borrowers who funded their loans on days other than the last day of the month.
FHA’s “Double Interest” Rule
Here’s how the old FHA refinance system worked.
Most borrowers who refinance with an FHA loan are paying off and closing an existing FHA loan. In fact, that’s a requirement for the popular FHA streamline refinance.
But paying off the existing FHA refinance came with an antiquated and unfair rule. FHA required the refinancing lender to pay off the existing loan on the first day of the month. To do so efficiently, the borrower needed to fund the new loan on the last day of the month prior.
Otherwise, FHA would charge the borrower interest all the way up to the first day of the next month.
For instance, if a borrower’s new FHA refinance funded on October 31, 2014, no additional interest was required. But if the borrower’s refinance funds on November 15, he or she would have to pay interest on the closed loan from November 15 through November 30.
The sixteen days of interest could mean an extra $500 or more in loan fees. Essentially, FHA was collecting interest on funds that were no longer loaned. Borrowers often had to pay interest on two loans for up to thirty days.
While technically FHA loans do not come with prepayment penalties, the “double interest” rule was a de facto prepay penalty for borrowers with closings after the last day of the month.
Controversial FHA Rule Deleted January 21, 2015
FHA has heard complaints on this guideline for years. Finally, in August 2014 FHA decided to change its rules.
However, the change did not become effective until January 21, 2015. Loans closing on or after this date are not subject to old rules.
Though it was long overdue, the new rule could not have come at a better time. FHA borrowers are flocking to take advantage of FHA rates in the 3’s.
Further spurring refinance activity, FHA reduced its mortgage insurance premiums from 1.35% of the loan amount per year, down to 0.85%. This represents a savings of $100 per month on a $250,000 mortgage, not including any savings from rate reductions.
Now that FHA borrowers don’t have to worry about double interest, FHA refinancing is easier than ever before.
Better Chances of Closing FHA Refinances On Time Without an “FHA Bubble”
Prior to 2015, lenders had a tough time closing all their FHA streamline refinances on time. Borrowers would apply throughout the month, but they all had to fund on the same day to avoid double interest.
This “FHA bubble” would slow down operations at certain points along the way.
Loan underwriters would get a glob of FHA refinance files the week before the end of the month. Escrow companies would get huge amounts of FHA closing documents and struggle to get all borrowers in to sign.
Signed FHA loan documents would return to the lender. Loan funders had to review and fund huge numbers of loans, all in one day.
The “FHA bubble” caused loans to miss the cutoff. Borrowers had to extend locks and double-pay interest for almost a month until the next FHA closing. At that point, they risked missing the cutoff again as another “FHA bubble” arrived.
Those days are gone. FHA refinance applicants no longer have to worry about closing on a specific day. Whether borrowers close on the 10th or 15th or any another day, they will only pay interest up to the day the loan funds.
FHA Refinancing Now a Better Value Than Just Months Ago
Compared to just a few months ago, FHA refinancing is a much better value. Since the beginning of 2015, FHA has changed its rules to decrease the cost of homeownership.
A review of recent changes is as follows.
FHA mortgage rates drop. FHA rates have been well below 4% since the start of 2015.
Mortgage insurance premiums (MIP) reduced. FHA borrowers now save $40 per month per $100,000 borrowed, not including any rate reduction.
Double interest rules repealed. FHA refinances can now fund on any day of the month without penalty.
New regulations and rates are aligning to make this one of the best times in history to refinance an FHA loan.