Part of what makes the USDA loan program possible is the funding fee that each borrower pays when they take on a new USDA mortgage. The program makes it possible for low and middle-income families to afford a home in a rural area. This rural area might not be what you assume rural should look like – oftentimes it is areas that you would want to live anyway and soon you will be able to do so with lower fees!
The Big Announcement
On April 28th of this year, the USDA announced that both the upfront guarantee fee and the annual fee will decrease on October 1, 2016. The decrease the upfront guarantee fee is taking is rather large, saving borrowers a large amount of money right away! The decrease is from 2.75% down to 1%. This percent is of the loan amount. So, for example, if you were taking out a $100,000 mortgage, right now your upfront fee would be $2,750, but in October it will be just $1,000 – a $1,750 savings! These savings can either be had up front if you are bringing the cash to close or it can lower your monthly payment slightly if you were planning on rolling the upfront fee into your loan amount.
In addition to the upfront fee becoming lower, the annual mortgage insurance fee will also decrease at the same time – October 1, 2016. This annual fee actually gets paid on a monthly basis as the USDA divides the fee up equally among the 12 months of the year. The fee gets calculated each year, on the anniversary of the date you took out the mortgage and is based on the balance of the loan at that time. Right now that fee is .50%, but it will decrease to .35% as of October 1st. On the same example from above, initially, this means a difference between a $41.67 per month additional payment and a $29.17 per month additional payment. Over time, this savings adds up, especially if you have the loan for a full 30 years.
Understanding the USDA Mortgage Fees
It is important to understand the fees you are obligated to pay on a USDA loan. The upfront fee is how the USDA stays in operation and how they can help thousands of borrowers every year get into the home they desire. The upfront fee is how the USDA sets up their reserves in order to guarantee the loans that lenders provide. Because the USDA guarantees the loan, if you were to default on it, the USDA would have to pay the lender a portion of the amount of money they lost out on. This is only possible with the upfront fee, which occurs with every USDA loan.
The annual fee on USDA loans differs from PMI or Private Mortgage Insurance. This fee is paid throughout the life of the loan; you cannot eliminate it once you hit a specific loan-to-value ratio as you can with a conventional loan. The annual fee does decrease each anniversary of your loan date, however, as long as you make your payments on time, allowing your principal balance to decrease.
In the end, the USDA loan is a great way to get a loan. If you are looking at purchasing a home in a rural area and you qualify under their credit and income guidelines, it makes sense to take advantage of the program. You are able to save a significant amount of money by not putting any money down, enabling you to have an emergency fund or even pay the loan down faster if you decide that is what you wish to do.Click to See the Latest Mortgage Rates»