Am I really skipping a payment?
Am I really skipping a payment?
If you’ve ever refinanced chances are you were promised the opportunity of skipping a payment. Most Loan Originators promise the opportunity of skipping a payment as a fringe benefit to the FHA refinance. The truth is you’re not really skipping a payment. Yes, you don’t have to write a check, go online, or physically make a payment at your bank, but this doesn’t mean you’re skipping a payment and avoiding the payment all together.
You may feel like you’re skipping a payment but the secret is, your payment is made in the payoff of your existing FHA loan.
What does it mean that your payment is included in the FHA payoff? In order to answer that question, we must understand how interest is calculated on your FHA mortgage.
First, it’s important to know that mortgage lenders collect interest in ARREARS – which means they collect interest at the end of the month rather than the beginning. When you make your FHA payment that is due on July 1st, you are paying all interest due for the month of June. When you refinance your FHA mortgage, the payoff figure will include 30 days of interest, even if you’ve never missed a payment. This is because interest is collected by the FHA lender at the end of the month or in ARREARS.
Next you need to know that FHA unfairly charges you for a MONTH OF INTEREST AT THE 1ST OF EACH MONTH rather than charging you per diem interest. What does this mean exactly? It means if you were to win the lottery and decide to pay off your FHA loan on the 3rd of the month, you would still be charged the remaining days in the month even though the FHA loan was paid off on the 3rd. If there was 31 days in the month, you would pay interest on the remaining 28 days. Why do they do this? FHA has promised a full month of interest on the 1st of each month to the investors who buy FHA securities, unfair BUT legal.
This is why American Heritage Lending will only close an FHA Streamline at the end of the month. Most the time we can complete the FHA Streamline earlier in the month but this would cause you to pay DOUBLE interest.
Lastly, it’s important to know that all lenders collect interest in advance when funding a new loan. This is typically referred to as PREPAID INTEREST OR INTEREST IN ADVANCE. When your new FHA loan funds, you begin paying interest to the new FHA lender beginning on that day.
Here’s a real life example:
Your new FHA loan funds on January 30th (TO AVOID DOUBLE INTEREST) – your new FHA lender will collect 2 days of PREPAID INTEREST at closing. There is no February payment because they’ve collected it at closing. February’s interest will then be due March 1st(IN ARREARS). This is when you will make your “first payment”.
So, the illusion is that you “SKIPPED” February’s payment. But, we all know now that the February payment for January’s interest was paid at closing when the old loan was paid off. The next Loan Originator who promises you a skipped payment is not a professional!
-Justin Smith