That’s got to be why the fees on a widely-used type of mortgage will be FALLING as of October 1, 2016.
The USDA Rural Development (RD) Single Family Housing program just announced that the cost of their version of mortgage insurance will be significantly lowered for fiscal year 2017! This is the period starting October 1, 2016 and ending September 30, 2017.
Commonly known on other loans as PMI, MI, or MIP, these fees are called guarantee fees on RD loans. It’s the same thing, by a different name – mortgage insurance that YOU pay, which covers the lender against any loss they might face should they foreclose on the house and have to sell it for less than what they are owed. Having to pay for something that benefits only the lender is frustrating, but it’s a necessary evil. Without it, lenders wouldn’t write mortgages.
On an RD loan, there are 2 parts to their guarantee fees: The first is an upfront, lump sum fee which you pay at closing. Currently it is 2.75% of the loan amount. The 2nd part is a recurring fee based on an annual 0.5% of the outstanding loan balance, which is broken down and paid monthly as part of your note. While it falls slightly as your principal goes down, this monthly fee stays in effect for the life of your loan.
RD has been raising their guarantee fees over the last few years (see our previous article) which is why we were utterly amazed when we were notified about the upcoming reduction. It will definitely benefit buyers who finance with an RD loan, thus helping sellers as well. Since the loan fees will be less, houses will be more affordable.
As an example: Currently, to buy and finance a $150,000 house with an RD loan would require a 2.75% upfront guarantee fee, which is $4,125.00. The annual guarantee fee of 0.5% is $750.00 per year, which works out to an extra $62.50 on the monthly note.
As of October 1, 2016 the upfront rate drops to only 1.0%, and the annual fee to 0.35%. On our $150,000 example house, this would make the upfront fee $1,500.00 which is a difference of $2,625.00. The annual fee would drop to $525.00, or $43.75 per month, a savings of $18.75 off of the note.
Regardless of the price of a home, these reductions are substantial, and will make a significant difference to many people. We salute the RD program for enacting these reductions.
- If you have an existing RD loan, these changes DO NOT affect you! Existing loans are locked in at the rates and terms in effect when the loan was originated.
- The new, lower rates only apply to loans which receive their official commitment from RD on or after October 1, 2016. If you’re buying a house prior to that date, and the RD commitment is issued anytime from now through September 30, 2016, the current rates will apply.
Let us know if you have any questions, or need help buying or selling!