Does USDA Mortgage Insurance Ever Go Away?
Learn if USDA mortgage insurance ever ends and explore strategies like refinancing to eliminate this ongoing cost.
Homeownership in rural areas is supported by various programs, including those offered by the United States Department of Agriculture (USDA). These specific loan options are designed to make purchasing a home more accessible in eligible areas, often without requiring a down payment. A feature of these loans is a form of mortgage insurance, which functions differently from other loan types.
Understanding USDA Mortgage Insurance
USDA mortgage insurance, often called a Guarantee Fee, protects lenders from financial losses if a borrower defaults. This protection allows the USDA to offer favorable loan terms, such as no down payment options. The insurance involves two distinct fees that contribute to the overall loan cost.
The first component is an upfront guarantee fee, a one-time charge of 1% of the loan amount. This fee is typically financed directly into the total loan, added to the principal balance rather than paid out-of-pocket at closing. For example, on a $200,000 loan, the upfront fee would be $2,000, increasing the financed amount.
The second component is an annual fee, calculated as 0.35% of the outstanding principal balance. This fee is divided into twelve monthly installments and included in the regular mortgage payment. As the loan balance decreases, the dollar amount of this annual fee gradually reduces, reflecting the lower outstanding balance.
When USDA Mortgage Insurance Ends
Unlike some conventional mortgage insurance that automatically ceases at a certain equity threshold, USDA mortgage insurance operates differently. The annual guarantee fee on a USDA loan generally continues for the entire life of the loan. It does not automatically drop off when a homeowner reaches a specific percentage of equity.
The mortgage insurance obligation typically remains as long as the original USDA loan is active on the property. It concludes when the USDA loan is completely paid off, or when the property securing the loan is sold to a new owner.
Another method for eliminating USDA mortgage insurance is by refinancing the existing USDA loan into a different mortgage type. This action replaces the USDA loan and its associated insurance with a new loan product that may have different insurance requirements or none at all. As long as the initial USDA financing is in place, the annual fee typically continues.
Eliminating USDA Mortgage Insurance Through Refinancing
Refinancing is a primary strategy for homeowners to eliminate USDA mortgage insurance while continuing to own their property. This process involves obtaining a new loan, commonly a conventional mortgage, to pay off the existing USDA loan. The new loan’s terms and mortgage insurance requirements replace those of the original USDA financing.
General refinancing steps involve applying for a new loan, including a credit check, income verification, and a home appraisal. Lenders assess the borrower’s financial standing and property value to approve the new loan. This new loan then disburses funds to pay off the USDA mortgage, concluding the obligation for the USDA’s upfront and annual fees.
Homeowners should evaluate several factors when considering refinancing. Building sufficient equity is important, as conventional loans often do not require private mortgage insurance (PMI) with at least 20% equity. Current interest rates are also a consideration, as a lower rate on a new loan could offset closing costs. Additionally, credit score requirements for conventional loans and the closing costs of the new mortgage are factors.