After increasing the price of a USDA-insured mortgage last year, the Rural Housing Service has now slashed the associated fees to make them much more affordable and attractive to home buyers.
Beginning October 1st, which not so incidentally is the start of fiscal year 2017, the USDA upfront guarantee fee will drop from 2.75% to 1%.
Yes, you read that correctly. Instead of having to pay nearly 3% of the loan amount to get a USDA loan, you’ll only have to pay 1%.
That’s cheaper than the FHA’s 1.75% upfront fee, and likely lower than the VA’s variable funding fee.
Additionally, the RHS is lowering the annual fee it charges on USDA loans from 0.50% to 0.35%, which will keep more money in the pockets of rural home buyers.
How Much Can You Save Thanks to This Change?
2.75%1% upfront guarantee fee0.50%0.35% annual fee
Most folks who obtain USDA loan financing will roll the guarantee fee into the loan so it’s paid over time, instead of upfront at closing.
This makes sense because these loans are often zero down mortgages that require little cash from the borrower.
Let’s look at an example of the savings to illustrate how much of a difference this change will make.
Imagine someone takes out a $200,000 USDA loan with zero money down. The guarantee fee is now 1% instead of 2.75%.
The guarantee fee is based on the total loan amount including the financed guarantee fee, so if the loan amount is $202,000 (including that 1% guarantee fee), the fee is $2,020 and the final loan amount is $202,020.
Assuming the mortgage rate is 3.5% on a 30-year fixed, you’re looking at a monthly mortgage payment of around $965 (including the also reduced 0.35% annual fee).
Under the old formula, you’d be stuck with a $205,655 loan amount and a $5,655 guarantee fee (if you financed it).
The monthly payment on that old loan would be roughly $1,007 per month.
That’s savings of roughly $42 a month, which doesn’t sound like anything super special, but over time could be pretty meaningful.
Heck, in a year you’d save over $500, using our example from above.
And for those with larger loan amounts, the savings can obviously be pretty significant.
Time to Take Another Look at a USDA Loan?
So if you were looking into a USDA loan but didn’t quite make the cut, maybe you can run the numbers again using the lower upfront guarantee fee and annual fee to see if you qualify.
Sometimes people are so close to qualifying that seemingly small changes can make a big difference.
Or if you simply felt there was a better deal elsewhere, it might make sense to run some new calculations to see if USDA is the better deal now with the lower fees.
For the record, the new fees apply to both new home purchases and those looking to refinance with a USDA loan.
As noted, the fee was increased a year ago from 2% to 2.75% to help the agency maintain the program without a congressional appropriation.
But it appears things are looking up for the USDA again, which explains the fee discounting this year.
Tip: Always be careful taking out a USDA loan around October as the fees can and will change, sometimes for the worse.