Do USDA Loans Have PMI? A Look at Guarantee Fees

USDA loans assist low-to-moderate-income individuals in rural areas with achieving homeownership. A common question is whether these loans require private mortgage insurance (PMI), similar to conventional loans. While USDA loans do not feature PMI, they incorporate a distinct fee structure that serves a comparable purpose.

Understanding USDA Loan Fees

USDA loans do not use private mortgage insurance. Instead, they have two types of guarantee fees: an upfront guarantee fee and an annual guarantee fee. These fees protect the lender against potential default, allowing the USDA to offer loans with no down payment requirements. The structure of these fees is periodically reevaluated and set by the USDA.

The upfront guarantee fee is a one-time charge, currently 1% of the loan amount for new purchase and refinance loans. The annual guarantee fee is currently 0.35% of the outstanding principal balance. This yearly charge ensures the program’s sustainability and mitigates risk for lenders.

Calculation and Payment of USDA Loan Fees

USDA guarantee fees are integrated into the loan process. The upfront guarantee fee, typically 1% of the loan amount, is usually financed directly into the total loan principal rather than being paid out-of-pocket at closing. For example, a $200,000 loan would effectively become $202,000 with this fee rolled in.

The annual guarantee fee, currently 0.35% of the unpaid loan balance, is calculated each year based on the remaining principal. This annual amount is divided into 12 equal installments and added to the borrower’s regular monthly mortgage payment. The monthly payment portion for this fee will slightly decrease over time as the loan’s principal balance is paid down.

Terminating USDA Loan Fees

Unlike traditional private mortgage insurance, which can often be canceled once a certain equity threshold is reached, USDA loan guarantee fees generally remain for the entire life of the loan. This is a significant distinction from other mortgage types.

The most common method for borrowers to stop paying these guarantee fees is by refinancing the USDA loan into a different mortgage product. For instance, converting to a conventional loan after building sufficient equity can eliminate the ongoing USDA fees. It is advisable to consider refinancing when the loan balance is significantly below 80% of the home’s value to potentially avoid new mortgage insurance requirements on the conventional loan.