What is PMI?
Homebuyers who can't put down a sizable down payment with a conventional loan will often need to pay for PMI, or private mortgage insurance. This insurance is designed to protect the lender in the event you default on your loan.
For conventional loans, you’ll typically need to pay for PMI unless you can put down 20 percent of the purchase price. You can cancel PMI for conventional loans once you’ve paid off at least 20 percent of the loan value.
"USDA loans don’t have PMI. But these specialized loans require two different forms of mortgage insurance: an upfront guarantee fee and an annual fee that serves as the monthly mortgage insurance premium." Said Sam Sexauer of Neighbors Bank. "Despite having two fees, the total costs of USDA mortgage insurance are often significantly lower than other loan options."
In fact, mortgage insurance costs on FHA and conventional loans can be double or even triple those of USDA mortgages, posing a serious barrier for low-income and cash-strapped buyers.
USDA Mortgage Insurance Fees
USDA mortgage insurance is paid via two fees: an upfront guarantee fee equal to 1 percent of the loan amount, and an annual fee equal to 0.35 percent of the loan amount.
The one-time upfront guarantee fee, which is also referred to as the USDA funding fee, is paid at closing and typically financed into the loan.
The annual fee is lumped into your monthly payment and is paid for the life of the loan.
Calculating the Upfront Guarantee Fee
USDA mortgages have the lowest funding fee of all government-issued loan products. The guarantee fee for USDA loans is 1 percent of the total financed amount – meaning the total balance of the loan, not the sales price of the property.
Take a look at how the USDA funding fee compares to a $250,000 mortgage:
|Loan Type||Funding Fee Rate||Estimated Upfront Costs|
|USDA||1% Upfront Funding Fee||$2,500|
|FHA||1.75% Upfront Funding Fee||$3,500|
|VA||2.15% Upfront Funding Fee||$4,300|
In the scenario above, if you decided to pay a $10,000 down payment on your USDA loan that would lower your loan amount to $240,000 and your guarantee fee to $2,400 (240,000 x .01 percent). The funding fee for VA loans varies based on several factors, such as nature of service, down payment and first-time use. The calculation above uses the most common funding fee rate for first-time use. Conventional loans do not have an upfront fee.
Calculating the USDA Annual Fee
In addition to the USDA origination fee, you will also have an annual fee of 0.35 percent of the loan’s balance. The annual fee is calculated annually, but paid monthly as part of your monthly mortgage payment.
USDA loan annual fees are recalculated at the anniversary of the loan's closing date every year, then spread evenly out in 12 equal payments.
Here's an example of how to calculate your USDA annual fee:
|Base Loan Amount|
|Total Loan Amount = Base Loan Amount + Funding Fee|
|Annual Fee = Total Loan Amount x 0.35 percent|
|Monthly Payment = Annual Fee / 12|
Annual fees for USDA and FHA loans are paid for the life of the mortgage, while VA loans only require the upfront funding fee.
Check Official USDA Loan RequirementsContact a home loan specialist here to determine if you're eligible. →
Comparing Mortgage Insurance Rates
Private mortgage insurance rates vary by loan product, down payment, credit score and other factors. Generally, PMI costs range anywhere from 0.5 percent to 1 percent of the loan amount.
The annual mortgage insurance premium for most FHA loans is 0.85 percent.
Here's a look at how those annual mortgage insurance costs stack up for new homebuyers, based on a typical $250,000 loan:
|Loan Type||Monthly Mortgage Insurance Cost|
With low mortgage insurance costs, no down payment requirements and less stringent income and credit requirements, USDA loans open the door to homeownership for many who have previously been shut out.
To learn more about mortgage insurance on USDA loans and your eligibility, contact a home loan specialist today.