Rule Change Eliminates ‘Prepayment Penalty’ On FHA-Backed Mortgages


Borrowers who prepay their Federal Housing Administration (FHA)-insured mortgages will not have to make interest payments beyond the date their mortgage is paid in full, under a new rule recently finalized by the agency.

Currently, lenders are allowed to charge borrowers with FHA-backed loans a full month of interest when they sell or refinance a home and pay off their mortgage – even if it happens at the beginning of the month. This ‘prepayment penalty’ is due to an old rule designed to protect investors who buy mortgage-backed securities, who currently have the right to demand full-month payments of interest plus principal even when a loan is closed at the beginning of a month.

Regulators have allowed the current rule up until now also because FHA lenders charge borrowers slightly below market rates to help compensate for the post-closing payments.

The new rule – which will apply to FHA-insured mortgages closed on or after Jan. 21, 2015 – explicitly prohibits lenders from charging borrowers post settlement interest for all FHA single-family mortgage products and programs.

In addition, the FHA has announced a new rule to ensure borrowers have early access to information when making decisions about their FHA mortgages. This rule, which would apply to adjustable rate mortgages originated on or after Jan. 10, 2015, requires lenders to provide borrowers at least a 60-day, but no more than 120-day, advance notice of an adjustment to a borrower's monthly payment. The FHA currently requires a 25-day advance notice.

The new rule also changes the ‘look back period’ to 45 days before the date of the rate adjustment from the current 30 days.

In guidance published in the Federal Register, the FHA urged lenders not to find new ways to penalize borrowers in light of the new rule. Instead, they should ‘look elsewhere’ to recoup whatever revenue they expect to lose due to the rule change, and should continue to offer consumers ‘the same interest rates that they offer now,’ rather than adding new fees.

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Lisa Ferguson
Lisa Ferguson
4 years ago

I have a flat loan and I refinanced it for a lower interest rate and also a shorter term. I wanted to pay it off early. I knew if I paid extra on my principal I could pay it off faster. My mortgage company said if I paid extra on my principle I would still have to pay the interest it’s a penalty. So to pay it off early l would have to pay double of my payment because I am paying the interest also and that you never pay up the interest and pay principal only. I never heard… Read more »