Can you be charged interest on your mortgage even after you've fully paid it off? Can the meter keep running when you owe the bank nothing — your principal balance is zero?
Surprise! Much to the chagrin of large numbers of home sellers and refinancers, the answer for years has been yes. If your loan was insured by the FHA and you paid it off before maturity, at closing you'd be expected to cough up a full month's interest, no matter what day of the month you actually settled.
Even if you closed on March 2, for instance, you'd be charged interest by your loan servicer through March 31, potentially adding hundreds of dollars to your costs in the transaction. The FHA's practice has been unique among major players in the housing finance marketplace. Fannie Mae, Freddie Mac and the Department of Veterans Affairs all require interest to be collected only to the day of principal payoff. After that, the meter stops.
But change is on the horizon. Thanks to a regulatory mandate from the Consumer Financial Protection Bureau, the FHA has agreed to end its controversial full-month interest policy, but only for future borrowers. The FHA has until Jan. 21 2015 to make the switch, so sellers and refinancers who currently have FHA-insured mortgages are cut out of the deal. Many will still get hit with extra interest charges.
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