Recently the USDA has annouced that there will be an increase to their Annual Fee. This marks the second increase in the three year history of this fee. Currently the annual fee stands at .40% of the mortgage balance. Effective October 1st 2014, the annual fee will increase to .50% of the mortgage balance.
What is the USDA Annual Fee?
The USDA Annual Fee is similar to mortgage insurance. This fee is collected from all borrowers to help the USDA remain financially solvent and to offset potential foreclosure losses.
How much does the USDA Annual Fee cost?
The annual fee is charged against the balance of the mortgage each year and then charged as a monthly amount. This monthly amount is calculated against the balance annually, so the monthly amount will decrease for payments 13 through 24. The annual fee would then be calculated against the balance after payment 12 and then after payment 24 and then after payment 36 and so on. Gradually this monthly amount decreases with time as the principal balance of the account decreases.
For example, a USDA Mortgage with an initial balance of $153,000 would have an intial payment towards the annual fee of $63.28 per month ((153,000 x .05) / 12) . At the end of each year, this annual fee would be recalculate based on the principal balance.
How does the cost of the USDA Annual Fee compare to the Mortgage Insurance required by Conventional and FHA?
Overall the cost of the USDA Annual Fee is cheaper than the comparable Mortgage Insurance (MI) for FHA and Conventional. Let’s take a look…
Previous Annual Fee New Annual Fee Conventional MI FHA MI
|Base Loan Amount: $150,000||Base Loan Amount: $150,000||Base Loan Amount: $150,000||Base Loan Amount: $150,000|
|Upfront Cost Paid to USDA (financed) : 2% Guarantee Fee||Upfront Cost Paid to USDA (financed) : 2% Guarantee Fee||Upfront Cost Paid (financed): Typically none when MI is monthly*||Upfront Cost Paid to FHA (financed): 1.75% Upfront MI Premium|
|Final Loan Amount: $153,000||Final Loan Amount: $153,000||Final Loan Amount: $150,000||Final Loan Amount: $152,625|
|Monthly Amount: $50.63||Monthly Amount: $63.28||Monthly MI Amount: $83.75**||Monthly MI Amount: $167.10|
|Required Down Payment: None||Required Down Payment: None||Required Down Payment: 5%||Required Down Payment: 3.5%|
*Conventional Mortgages also have options for financing the mortgage insurance which may lessen the needed amount for a monthly amount or eliminate monthly mortgage insurance altogether. **Conventional Mortgage Insurance varies according to down payment amount and credit score. Assumptions of 5% down and a 700 credit score were used for this example.
The costs of obtaining a USDA Mortgage in Pennsylvania and the rest of the country just went up a little bit. Overall, USDA Mortgages remain cheaper than most other mortgage options and will be a solid choice for homebuyers in USDA eligible areas.