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FHA Inflates Refinancing Costs

Your FHA mortgage was a great deal at the time... only 3 percent down and the closing costs weren't bad, either. But that was then. Now you want to refinance to today's lower interest rates. Not so fast! Get ready for a strong dose of reality, courtesy of the Federal Housing Administration. It could cost big bucks to refinance your FHA loan, more than a regular conventional loan.

The costs are so high, in fact, that they might be discouraging FHA mortgage holders from refinancing at all. According to a review of HUD data, about 3 million FHA homeowners who pay 8 percent interest or higher have not yet refinanced their loans. With millions of other refinancers already jumping on mortgage interest rates below 7 percent, FHA mortgage holders are definitely behind the curve. Countrywide Home Loans Inc., a large private mortgage lender, did the review of FHA loans.

Here are the fees and charges you can expect to ring up when trying to refinance your FHA loan:

"Carry-over" Interest. You'll pay an entire month's interest on your old FHA-insured loan, not matter what day of the month you close on your new loan. For example, even if you close on the 10th, you'll pay interest for the whole month.

End-of-Month Interest. Of course, you'll also pay interest for the remainder of the first month of your NEW loan. So if you close on the 10th, you'll owe interest from that day until the end of the month, on top of the Carry-over interest from your old loan--a double whammy.

Escrow Payments. You'll be charged anywhere from two to six months' worth of homeowners' insurance premiums and property taxes, held in escrow until the closing date on your new loan. Have you been double-charged again? Absolutely--you've already placed money in your current loan's escrow account to cover those months. But FHA requires the extra payments in case the old lender is slow on turning over the balances in your account.

Obviously, refinancing any loan, be it FHA or conventional, is going to cost money. You'll face certain refinancing fees and charges, including loan origination fee, processing or underwriting fee, appraisal, credit report, etc.

But how do you avoid the extra costs of refinancing your FHA loan? First, to minimize double-interest charges on your old and new loans, check with your potential lender about trying to close at the end of the month, or as near to the end as possible without drifting into the next month. It will require cooperation between you and your lender, good timing and a little luck. But it's worth asking. For insurance purposes, ask your lender to cover interest charges if closing doesn't occur within a few days of your target date.

Other things to explore while you're shopping around-Ask lenders if they offer any special breaks on closing costs for FHA loan refinance deals, such as contributions toward interest charges or escrow payments, or waivers of various fees.

Sources used to create this article include the Chicago Sun-Times.