A controversial practice by the nation’s largest mortgage lender may force homeowners to pay hundreds of dollars extra in fees after they’ve already paid off their loans. Critics recently introduced legislation to make the practice illegal.
People who receive a mortgage from the Federal Housing Administration have the option of making their mortgage payments early in the month. This wins them a slightly lower interest rate and saves them money over the life of the loan, the FHA told the Columbus Dispatch. The agency did not immediately return calls seeking comment.
But when people making early payments send in their last mortgage check, or if they sell the house early in the month, the FHA still charges them interest for the entire last month. For example, the loan may be paid off in full on April 2, but the FHA continues to charge interest as though it isn’t paid off until April 30.
Those extra charges add up fast. The average excess interest payment to FHA was $528, according to the National Association of Realtors. That earns investors in FHA loans an extra $587 million in fees every year, the association found.
“This is an issue of fairness,” Senator Ben Cardin, a member of the Senate Finance Committee who introduced legislation in March to ban the practice, said in a press release. “Homeowners should not have to pay interest on loans that have been fully repaid and my bill will require lenders to treat FHA loans just like they treat conventional loans when a home is sold or refinanced.”
Since the housing bubble burst, the Federal Housing Administration has become the largest mortgage lender in the country. By the middle of 2010, the agency was responsible for 40% of all new mortgage loans in the country.
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