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