As mentioned in several previous blog entries, USDA drastically reduced the fees on its $0 down mortgage program on October 1st of this year. In this article we will revisit some examples we’ve previously provided that illustrate how much a typical homebuyer can expect to save as a result of USDA’s lower fees.
As you may recall from previous blog entries, the fees USDA charges on its $0 down loan program consist of a one-time upfront “guarantee” fee and a monthly “servicing” fee. Under USDA’s new fee structure, the upfront guarantee fee is now 1.0% of the loan amount (it had previously been 2.75%) and the monthly servicing fee is now 0.35% of the average scheduled unpaid principle balance on the loan (it was previously at 0.50%).
So what do these fee decreases mean for the typical homebuyer? To answer this question let’s see what the USDA fees would have been prior to October 1st on a $0 down $135,000 home purchase versus what they’d be today. Under the old USDA fee structure the upfront guarantee fee on a $135k purchase would have been $3,817.48 and the monthly servicing fee would have been $57.34 during the first year of repayment. If we utilize 3.500% as the interest rate on a 30-year fixed rate USDA loan, the combined principal, interest, and servicing fee payment comes out to $680.69 per month.
Now let’s see what happens if we apply the new, current USDA fee structure to the same $135k home purchase scenario as described above. The results speak for themselves: the upfront guarantee fee drops to $1,363.63, which is a savings of $2,454 over the old fee. The servicing fee goes down to $39.43 per month during the first year of repayment, which equates to a savings of roughly $215 when compared to what the old servicing fee would total up to over the same time period.
In addition to the monthly savings brought about by the lower USDA fee structure, it also results in more purchasing power for the homebuyer. To explain, as mentioned in the example above, when USDA’s old fee structure is applied to a $135k home purchase the combined principle, interest, and servicing fee payment comes out to $680.69 per month. With USDA’s new fee structure, a homebuyer is able to achieve this same monthly payment with a purchase price of $141,000. In other words, the homebuyer in our example has gained $6,000 in purchasing power as a result of the lower USDA fees that went into effect on October 1st.
Thanks as always for reading!