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Question: Last year the FHA lowered its annual insurance premium. Is there any chance the USDA might do the same with their rural home loans?
Answer: Yes. In a move that will save new borrowers big money, the USDA is reducing both the upfront and annual mortgage insurance premiums for its single-family housing guaranteed loan program. The new and lower premiums start for loans originated on or after October 1st.
The U.S. Department of Agriculture long has offered to support home mortgages in rural areas. The great attraction of the guarantee program is that it allows qualified purchasers to borrow with 0 percent down. However, just like the FHA program with 3.5 percent down, the USDA does not make the actual loan. Instead it insures them and therefore borrowers must pay insurance premiums.
Right now there are two premiums: a 2.75 percent upfront guarantee charge at closing that can be folded into the loan and a .5 percent annual insurance premium. In rough terms, if you borrow $185,000, the current upfront premium will be $5,087. Combine the two and the total adjusted loan amount is $190,087.
With a 3.75 percent interest rate, the monthly cost for principal and interest will be $880. The annual insurance premium is .5 percent so the borrower will pay roughly $79 in the first month for insurance coverage. In total, the housing cost will be $959 ($880 plus $79), with taxes and insurance extra.
As of October 1, 2016, the numbers change. The 2.75 percent upfront fee falls to 1 percent and the .5 percent annual mortgage insurance premium drops to .35 percent. Now the numbers in our example look like this:
The upfront fee drops from $5,087 to $1,850, a savings of $3,237.
The debt moves from $190,087 to $186,850. The monthly cost for principal and interest goes from $880 to $865, a savings of $180 a year. The monthly insurance premium drops from $79 to $54, a reduction of $25 a month or $300 a year. Instead of a $959 monthly cost, the new number is $919.
The big savings from the new pricing structure include lower monthly costs, but a big benefit is in the form of less debt because the up-front premium is so much lower. Since there is less debt, less is owed to the lender when the property is refinanced or sold.
USDA loans are both attractive and complex. There’s an income limit for borrowers and the property must be in an eligible location.
For details and specifics speak with lenders who specialize in USDA loans.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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