Most government loans have some type of annual fee that helps them fund their reserves. This money is what makes programs like the USDA, FHA, and VA program able to run. The departments use these funds to pay banks that have defaulted loans. The USDA Refinance is no exception to this rule – this program requires a 0.5% USDA annual fee.
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USDA Mortgage Annual Fee
The USDA annual fee is a fee that you pay with your mortgage payments. You do not write a separate check or pay a separate fee. Just like your escrowed taxes and insurance, you pay the fee along with everything else.
The amount you pay for the annual fee will vary slightly from year to year. Once you pay down the principal, the annual fee decreases because the USDA bases it on the average amount of outstanding principal for the loan. In the beginning of the loan, you pay only a small portion of the principal down, which is why the annual fee is the highest at this point. As the years go by, you start to pay the principal down and your average unpaid principal begins to decrease. You will, however, pay this fee until the entire loan is paid off.
Where does the Money Go?
The lender that services your loan takes the annual fee money and puts it in an account. From this account, they pay the annual fees billed to them by the USDA. The USDA only bills one time per year, but in order to make the fees more affordable for borrowers, 1/12th of the amount due is charged every month.
Can you Eliminate the USDA Annual Fee?
Many people wonder if the USDA annual fee is like the Private Mortgage Insurance required on conventional loans when you put down less than 20 percent on the home. With conventional loans, once the loan-to-value ratio of the home hits below 80%, the homeowner is able to have the PMI eliminated. Unfortunately, this is not the case for USDA loans; the annual fee is for the life of the loan.
The reason behind the required fee for the life of the loan is because it is not a gauge against default on your loan in particular. It is more of a group effort to help fund the USDA to be able to help homeowners. The USDA program is among the most flexible programs available, helping to build up rural areas throughout the United States. With no down payment requirements, the loans they approve can be slightly risky. In order for them to have the money to continually pay for homes that default, they need to charge the annual fee.
The only way to eliminate the annual fee charged by the USDA is to refinance the loan into a different type of loan. You have many options when it comes to refinancing, however, the FHA program also charges an annual fee regardless of the loan-to-value ratio, so it is more beneficial to wait until you qualify for a conventional loan.
Typically, once you hit less than an 80% LTV, you can try to refinance into the conventional loan. You should know, however, that conforming loans sometimes have slightly higher interest rates than USDA loans. The government-backed program is able to offer lower rates to low-income households in order to make the mortgage the most affordable for them. Conventional loans, on the other hand, cater to middle-of-the-road borrowers that have good credit and an average debt ratio.
The USDA annual fee should not be a reason to turn away from the USDA Streamline Refinance as it is a great program. The entire premise behind the streamline program is to save homeowners money every month. One of the stipulations, in fact, is that the interest rate decreases at least 1% in order to qualify for the streamlined process. This in itself offers you a large benefit as you are able to save money every month on your mortgage payment, making the annual fee even more affordable for you to pay every month.
The USDA annual fee is not a negotiable fee, nor is it one that will ever disappear. If you plan on taking on USDA financing, plan for the annual fee for the remainder of your loan.