The USDA loan charges two fees: the upfront guarantee fee and the USDA monthly guarantee fee. Both fees help keep the USDA funded so they can continue to guarantee loans for low to moderate income buyers. The good news is that the monthly fee is being reduced from 0.5% to 0.35% as of October 1st of this year. Regardless of the amount of the fee, let’s look at how it is calculated.
The USDA monthly guarantee fee calculation is based on the average unpaid principal balance for the life of the loan. The fee is calculated every twelve months and billed accordingly. It starts off being calculated based on the loan amount on the mortgage note and continues to be charged for the life of the loan or until the loan is paid in full, whichever occurs first.
The average annual unpaid principal balance for each year can be found on your amortization schedule that you receive at the closing to help you figure out what you will have to pay. Typically in the first few years of the loan, your average annual unpaid principal balance will remain fairly stable as you typically pay a lot more interest than principal in the first few years of the loan. Because of that, you will not see a dramatic drop in the amount of the monthly guarantee fee that you must pay. As you make your way further into the loan, however, you will see a drop in the costs, saving you even more money on this loan program.
Let’s look at a $100,000 loan as an example. In that first year, you will only pay a small amount of principal, which will bring your average for the year at $99,443. This $99,443 amount is used to calculate your monthly guarantee fee. At 0.50%, you would pay $497 per year or $41.41 per month. As of October 1st, on the same loan, you would pay $348 per year or $29 per month.
As the years progress, your average outstanding balance will decrease and your payments will go down accordingly with each new billing. You can calculate the amount of your future payments based on your amortization schedule if you want to see how it would play out for your exact loan.
Of course, things could change throughout the course of your loan. The annual guarantee fee amount could change, as it does often or you could decide to refinance your loan. If you refinance, you are starting back at square one, where your monthly guarantee fees will be high again. They will decrease as you continue to pay the loan down, but just keep in mind that the amounts will increase when you start the loan all over again.
If you are strictly refinancing to lower your interest rate, as is possible with the USDA streamline refinance loan, you will likely not change the monthly guarantee fee by much since you are not taking out any additional principal, with the exception of any closing costs that you roll into the loan to make it more affordable to refinance.
The USDA monthly guarantee fee is not something that can be negotiated or worked around; you must pay it on every USDA loan. It is a fairly affordable charge that is less than any other loan program would charge, which helps to make this loan continually more affordable and attractive for first-time homebuyers as well as homebuyers that are within the low to moderate income categories.