Annual Fee for USDA Mortgages set to Increase on October 1, 2014

Recently the USDA has announced that there will be an increase to their Annual Fee.  This marks the second increase in the three year history of this fee.  Currently the annual fee stands at .40% of the mortgage balance.  Effective October 1st 2014, the annual fee will increase to .50% of the mortgage balance.

 What is the USDA Annual Fee?

 The USDA Annual Fee is similar to mortgage insurance.  This fee is collected from all borrowers to help the USDA remain financially solvent and to offset potential foreclosure losses.

 How much does the USDA Annual Fee cost?

 The annual fee is charged against the balance of the mortgage each year and then charged as a monthly amount.  This monthly amount is calculated against the balance annually, so the monthly amount will decrease for payments 13 through 24.  The annual fee would then be calculated against the balance after payment 12 and then after payment 24 and then after payment 36 and so on.  Gradually this monthly amount decreases with time as the principal balance of the account decreases. 

For example, a USDA Mortgage with an initial balance of $153,000 would have an initial payment towards the annual fee of $63.28 per month ((153,000 x .05) / 12) .  At the end of each year, this annual fee would be recalculate based on the principal balance.

 The costs of obtaining a USDA Mortgage in Pennsylvania and the rest of the country just went up a little bit.  Overall, USDA Mortgages remain cheaper than most other mortgage options and will be a solid choice for homebuyers in USDA eligible areas.