USDA Interest Rates
USDA Home Loans are guaranteed by the United States Department of Agriculture, which provides approved USDA Lenders with the ability to offer highly competitive interest rates. Rural and suburban homeowners who are eligible often find that the USDA Home Loan program rates are lower compared to FHA or conventional loans. Zero down, with lower interest rates and mortgage insurance means a more affordable mortgage payment for you.
» More: Check Your USDA Loan Eligibility
How Are USDA Interest Rates Determined?
USDA Mortgage Rates are determined by current market conditions and are subject to change on a daily basis. Representatives from the Federal Reserve Board and Federal Reserve Bank meet once a month to assess the economic status of the country and make adjustments to interest rates based off of what the country needs at that time.
Mortgages rates, in general, have been moving upward since 2016 and the Federal Reserve aims to continue increasing rates for the remainder of the year. Rule of thumb, when the economy is doing well, then the rates will increase. If you are in the market to purchase a home, or are considering purchasing a home, this is the time to buy and take advantage of the rates before the next increase.
What Determines My Rate?
You might be surprised to learn that there is actually no one given rate at any one time. This is due to the fact that there are many factors that make each individual’s mortgage rate different.
Credit score and history predict how reliable you will be in paying your mortgage. Scores are based off of your credit report. Individuals with higher credit scores received lower interest rates compared to those with lower scores.
Your debt-to-income ratio is exactly what it sounds like: the amount of debt you have in the form of mortgages, auto loans, student debt and credit cards, compared to the amount of income you bring in. Your debt-to-income ratio is a signal of how much you can afford and is used by lenders when weighing risk.
USDA Loans require borrowers to have a debt to income ratio that does not exceed 41 percent. This is to ensure you can afford making the payments on the prospected home. However, ratios can be extended up to 34/43 with certain compensating factors.
Loan amount and home price also affect the rate. Rate can increase if the loan is extremely small or large. Loan amount will be your home price, plus USDA upfront Guarantee Fee, plus your closing costs (if included in the loan amount).
What is the Maximum USDA Rate Allowed?
USDA rates do not exceed the Fannie Mae 30 year fixed rate. Lenders are able to look up the daily fixed Fannie Mae rate and provide the lowest rate available for your USDA loan.
The interest rate is fixed for 30 years. Adjustable rate mortgages, hybrids, balloon term, and interest only mortgages are not eligible with a USDA loan.
With a fixed rate, the monthly payment never changes. You can always make extra payments if you want because USDA loans carry no prepayment penalty. This is because the interest rate is applied to the outstanding balance and as the loan is gradually paid down, more is allotted to principal.
What are Points and Lender Credits?
You can pay an upfront fee “points” to lower your interest rate. This fee would be paid at closing. While lender credits can help decrease your closing costs in exchange for a higher rate. By paying a higher rate the lender can give you money to offset your closing costs. Just keep in mind USDA has a max rate that can be given.
What is an APR?
What exactly is the difference between an interest rate and an APR? This can confusing for a lot of people but we are going to break it down for you.
Interest rate is the cost of borrowing on the principal loan amount and is expressed as a percentage. While the APR represents the total cost of the mortgage, it includes the loan originator fees, closing costs, points and is also expressed as a percentage. APR or annual percentage rate is higher than your interest rate because it encompasses ALL loan costs. Typically, the higher the APR the higher the payments over the life of the loan.
When is your USDA Loan Interest Rate Locked?
Rates can be locked at any time during the loan process. Your USDA loan specialist may lock the rate for 30, 45, or 60 days, and this guarantees that the lender will provide this rate by the specified date. Locking at the right time protects your rate from going up during the rate lock period.
How to Determine the Total Interest Paid Over the Life of the Loan?
Using the mortgage amortization calculator you can determine the total interest paid over the life of the loan. Amortized loans require a set amount to be paid each month so that both interest and principal are paid by the end of your loan term (30 years).
Know Your Term
The USDA loan program provides two basic options when financing a home, a 30 year fixed rate term and a 15 year fixed rate term. It’s important to note that even though the 30 year fixed rate is the most heavily marketed, some USDA lenders do have the option of adjusting the term to a 15 year. Years available are dependent on the lender and the USDA loan type.
The primary reason the 30 year is the most popular choice is because the payment is lower. Due to the loan amount spread out over a longer period, the payments are lowered. There is a drawback however in terms of the amount of interest paid over the life of the loan. In addition, early in the loan much more of the payment is devoted to interest and less to principal. After the first year or so, you’ll notice the loan balance has barely moved. This is because the interest rate is applied to the outstanding balance and as the loan is gradually paid down, more is allotted to principal.
The 15 year loan, because it’s compressed into a shorter period, pays the lender much less interest over the life of the loan and borrowers build up equity much faster. The drawback on this loan term is the monthly payments are much higher.
- Know how much is being financed.
- Know your interest rate.