Refinancing your USDA loan with the USDA Streamline Refinance requires very little verification. What it does require, however, is the standard fees. The USDA Streamline Refinance guarantee fees are still 2.0 percent upfront and 0.5 percent of the outstanding principal balance annually. Because of the affordability of this loan, however, it is still generally a great deal for borrowers.
The Upfront USDA Streamline Refinance Guarantee Fees
The upfront USDA Streamline Refinance guarantee fees might seem like a lot, but the good news is you can roll them into your loan. Let’s look at an example:
John has a current USDA loan that is eligible for a USDA Streamline Refinance. His outstanding principal balance on his current loan is $107,000. The upfront guarantee fee is $2,140 and the closing costs are $2,000. John is able to take out a new USDA loan for $111,140, which is the total of the outstanding principal, the upfront guarantee fee, and the closing costs. This leaves John with no out of pocket expenses and a new loan with an interest rate that is 1.5% lower than his original rate – not a bad deal!
The upfront guarantee fees help the USDA fund their reserve account. This is the account they have set aside for times when they have to purchase a home back from a bank. This happens when a USDA borrower defaults on their loan long enough that the house goes into foreclosure and the bank takes possession. Because the USDA guarantees the loan, they pay the bank the amount guaranteed and take possession of the home, selling it an auction at some point down the road to try to recoup their losses.
The Annual Fees
In addition to the upfront guarantee fees are the annual fees every USDA borrower must pay. These fees are much lower than the upfront fee. On the streamline program, the annual fee equals 0.5 percent of the outstanding principal balance. This amount will change from year to year. The USDA bills the lender that services your loan for the full amount of the annual fee. The lender does not bill you for the full amount on a one-time basis, however. Instead, they bill you monthly with your regular mortgage payment in order to make the fees more affordable for you.
The USDA figures your annual guarantee fee based on the average outstanding principal balance for the year. This amount can be determined by looking at the amortization table you received at the closing. Every year, this amount will decrease as the more time that passes, the more principal you pay down. The annual fee will always be in existence since you will always have the principal to pay, but it will decrease as time goes on.
In order to understand the fee, let’s assume you have $105,000 outstanding on your loan as an annual average right now. Your total annual fee would equal $525. Rather than paying that amount all at once, the lender would divide it up equally amongst the 12 months, adding just $43.75 to your monthly payment.
Comparing Guarantee Fees
FHA loans are the closest type of government-backed loans to USDA loans, but their guarantee fees do not compare. The FHA upfront guarantee fee equals 1.75 percent of the loan amount, which is slightly lower than the upfront USDA Streamline Refinance guarantee fees; however, the annual FHA mortgage insurance fee equals 0.85 percent whereas the USDA annual fee equals 0.5 percent. Let’s look at a real example:
On a loan amount of $110,000, the FHA upfront fee equals $1925 and the USDA upfront fee equals $2200. The annual fee on a loan amount of $110,000 would equal $935 for the FHA loan and $550 on the USDA loan. In that first year, you would save $110 even with the higher USDA upfront guarantee fee and the savings continue year after year.
The USDA loan offers a very simple way to receive an interest rate that is at least 1 percent lower than your original loan. This enables you to save a significant amount of money every month, making your loan more affordable. Even with the guarantee fees involved, the savings will definitely help you to recoup those costs and help you get ahead in your finances much faster.