Interest Charged on Principal for Entire Month when Prepaying Mortgage?

"If you prepay your [FHA] loan on other than the regular installment date, you may be assessed interest charges until the end of that month"

This was on a document I had to sign as part of the application package for the mortgage broker I was using for the house we have under contract. It was under a section titled "FHA Loans Only".

I long suspected that was the case with prepaying a Chase mortgage I have (which may very well be a FHA loan, don't recall). I recommend always prepaying your mortgage on the last day of the month and not attaching it as part of your mortgage payment as these prepayments usually end up occurring at the beginning of the month.

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Comments (4)

Thanks for the tip! I need to check mine as well which happens mid-month. I hope my CU isn't doing anything evil!

Posted by Moneycone | August 7, 2011 8:49 AM

That is so bogus. I have a FHA loan and it has so many little loopholes and issues. I wish I had gone more traditional.

Posted by John Cardero | August 7, 2011 5:25 PM

This is true of most US mortgage loans because the interest is accrued monthly. You wouldn't want a simple interest (daily accrual) mortgage because if you paid even one day after the due date every month, you would still owe a balance after you made all of your regular payments. Most auto loans are simple interest loans, where paying even regular payments a few days early each month will result in interest savings.

Making extra mortgage payments will save you money on interest, but sending in extra money won't change the interest owed for the current month. The interest charge for future months will be lower than it would have been if you hadn't sent in extra money, and that's how prepaying saves you money in the long term.

Posted by First Step | August 8, 2011 8:50 PM

Good to know! I've been paying my 30 year mortgage as though it was a 20 year mortgage, in order to pay it off quicker and to have the flexibility to not have to make 20 year payments when things get tough (like this year right). I'll have to take a closer look at my statements to see when they are posting my payments, as I usually make payments 2 weeks before due date.

Posted by The Money Ways | August 13, 2011 10:35 AM