Refinancing your mortgage can save you big bucks if you’re able to snag a lower interest rate or reduce your monthly payments. If you’ve got a USDA loan, your financial life may be about to get a little bit easier. The Department of Agriculture has revamped its refinance guidelines for rural home loans so if your mortgage was issued through the program, keep reading to find out how it can help.
What the new rules are designed to do
USDA loans already have the advantage of being fairly low-cost for buyers because they don’t require any sort of down payment. You do, however, still have to pay for closing costs and private mortgage insurance.
The updated refinance guidelines are intended to make the refinance process less expensive and more efficient for homeowners who qualify. According to the USDA’s estimates, the program has the potential to save homeowners $150 a month on average. In a pilot program, some participants were able to shave as much as $600 off their payment each month.
How the program helps homeowners
The main purpose behind the new rules is to streamline the refinance process and one of the way the USDA is doing that is by waiving certain requirements for qualifying homeowners. For example, as long as you’ve paid your mortgage on time for the 12 months prior to applying, you won’t have to get an appraisal, undergo a credit check or submit to a debt-to-income ratio calculation as long as you’re refinancing into a new 30-year loan.
Those moves are designed to shorten the length of the underwriting process, which means you’re not having to wait as long to get your loan approved. On top of that, you’re not having to shell out $50 for a credit check or $500 to $600 for an appraisal, which is an advantage if you’re trying to make refinancing as inexpensive as possible.
The USDA is also allowing qualifying homeowners to roll the closing costs into the loan. Considering that closing costs typically run between 2% and 5% of the loan amount, according to Zillow, that could also save you a pretty penny.
Are there any downsides?
Refinancing an existing USDA loan into a new one has some advantages but there are some drawbacks to consider. First, this program isn’t designed for homeowners who want to do a cash-out refinance. In other words, you can’t refinance if your only intention is to draw on the equity you’ve built up in the home.
Next, refinancing into a new USDA loan won’t eliminate your obligation to pay mortgage insurance. Currently, USDA borrowers are charged an upfront premium of 2.75% of the loan value, plus an annual premium of 0.50%. Both can be rolled into the loan amount but the only way to get out of paying it altogether would be to refinance into a conventional loan, assuming you have at least 20% equity.
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Finally, it’s important to remember that you’re only able to skirt the appraisal, credit check and debt-to-income calculation requirements if you’re locking in a new 30-year loan. If you’ve already paid down a substantial amount of the principal on your home, extending the loan term could cost you more in interest over the long run.
The bottom line
Before you commit to a USDA refinance, take some time to see what other options are available. You may be able to squeeze more savings out of the deal by refinancing into a conventional or FHA loan instead. Just be sure to check the individual credit requirements for each type of loan to make sure your credit score measures up.
