Image insert into post problem - url tilde character ( ~) gets converted into % and image doesn&#03

I am working on a multisite project where the domain name isn't pointed to the server yet. So all sites look something like this (main site) or this (example of subdirectory site) Everything is going pretty smoothly except for image uploading. I write a post, insert an image, but the uploading doesn't recognize the tilde ( ~) and turns it into a % or some other weird character. So the only way to insert it is to upload it into the media library first, and then insert it from the library. The interesting thing is the Featured Image works fine. Is there a setting I should change somewhere? Thanks.