Monthly mortgage insurance is a term that makes many would-be homeowners cringe. Who wants to pay extra money on their mortgage when they are already paying principal and interest? The unfortunate truth is that most mortgage programs charge some type of fee and the USDA loans are no exception. Even the USDA Streamline Loans require monthly premium payments, but in this case, it is to keep the USDA operating.
A Rural Housing Program
The USDA program is a rural housing program that helps to build up areas that would otherwise stay undeveloped. With flexible financing terms and easy-to-qualify-for programs, low-income households have a great advantage with this program. The USDA offers the following benefits:
- No down payments
- Lower than average interest rates
- Reasonable closing costs
Because of these benefits, the USDA does need to charge some fee in order to keep their reserves up. Without the reserves, the USDA would run out of money to pay the banks back that have defaulted USDA loans. If this were to happen, there would not be any other USDA loans to give to future homeowners.
What is the Monthly Mortgage Insurance?
The USDA monthly mortgage insurance is known as the USDA annual fee. Technically, the fee is charged once per year. To make it easier for homeowners; however, the servicing lender divides the fee up into equal 12 installment payments. This way the charge is on your mortgage payment. This serves two purposes:
- The USDA gets their money on time every year because the bank keeps the monthly payments in a reserve account and then pays the money out when they get billed
- The amount is more affordable for homeowners since it is divided up among the 12 months
If the lender did not divvy up the payments into the 12 months throughout the year, you would be stuck paying a larger fee once per year. For example, on a $150,000 loan, the annual fee is $750 for a USDA streamline loan. Instead of paying that amount, however, you could pay $62.50 per month, which seems much more affordable.
Can you Eliminate the Monthly Mortgage Insurance?
Unfortunately, you cannot eliminate the monthly mortgage insurance on any USDA loan, including the streamline loan. This fee is for the life of the loan – as long as there is a principal balance, there is an annual fee. The amount of the fee will go down throughout the life of the loan, however. The amount you pay is based on the average amount of the outstanding principal for the year. You can see the amount from year to year on your amortization table. You will then pay 0.5% of that amount each year. As you pay the principal down, the amount of mortgage insurance you pay will obviously decrease as well.
Refinancing the USDA Loan
The only way out of the mortgage insurance payments on a USDA loan is to refinance the loan into another program. However, the kicker is that FHA loans also have an annual fee, leaving conventional loans as the only program available to you. If you have less than 20% equity in the home, you will be stuck paying Private Mortgage Insurance anyways, which is usually much higher than the mortgage insurance rates charged by the USDA.
You can look at the USDA monthly mortgage insurance as a small price to pay for a very flexible loan. Not only did you get flexible qualification guidelines when you first took out the USDA loan, but now you get even greater benefits with the streamline loan. You do not have to verify any income, credit, or the value of your home. Basically, you just have to prove that you make your housing payments on time; that the interest rate will decrease at least 1%; and that the term is a 30-year term.
The mortgage insurance you must pay is a small price to pay for low-interest rates and low closing fees. In addition, you never had to put a down payment down on the home, so you were able to take advantage of purchasing a home with very little money upfront. The USDA program is a great way to purchase a rural home and if the mortgage insurance helps the USDA continue the program, then that is a small price to pay.