Homeowners can refinance USDA loans just like any other mortgage. A USDA refinance is worth considering if you’re looking to finance a property in a rural or suburban area with a population of 10,000 or less. Eligibility is based on income and location, and the loan doesn’t require you to purchase a farm or ranch.
The decision to refinance USDA loan programs isn’t the right move for every borrower. Make sure you understand the advantages and disadvantages of this home loan option before talking to a lender. You’ll also learn there are different types of USDA refinancing and that you may benefit more from a particular program than another.
Pros
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Flexible credit requirements
You can refinance USDA loan programs without a perfect credit score. So, even if you have high credit balances or a few late payments in the past, you could still qualify for this loan option.
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Competitive fixed interest rates
USDA borrowers have access to some of the lowest rates in the industry. Remember that a higher credit score translates to a potentially lower interest rate.
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Low private mortgage insurance (PMI)
Private mortgage insurance covers the lender if you can’t continue making your payments. Opting for a USDA refinance ensures you’ll pay as little as possible in PMI.
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No prepayment penalty
Some loan programs have a penalty for paying off your loan early. That’s not the case when you refinance USDA loans, though. Borrowers can choose to make extra principal payments on their mortgage and own their home free and clear sooner.
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Can roll closing costs into the loan
You don’t have to worry about coming up with thousands of dollars for closing costs. A USDA refinance lets you roll these expenses into your new loan. That way, you can take advantage of everything that comes with this loan option without dipping into your savings.
Cons
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Restrictions based on location
Unfortunately, borrowers can’t refinance USDA loans anywhere. The USDA website can help determine if the property you are interested in refinancing falls within a USDA eligible area.
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Income limits
If you exceed the income limits set by the USDA, you won’t be able to move forward with a USDA refinance. You can still talk to a lender about alternative loan options.
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Unable to cash out your home equity
As property values rise and you continue making loan payments, your home equity increases. Unfortunately, you can’t access any of that equity as cash when you refinance a USDA loan.
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No duplex homes allowed
The residence must be a condo, manufactured home, unit development, or single-family home.
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Mortgage insurance included
PMI can add hundreds of dollars to your mortgage payment depending on the home you refinance. That said, chances are it’s a price worth paying for a more favorable home loan.
Qualifications to refinance a USDA loan
You will need to meet certain qualifications to refinance a USDA loan. These requirements vary based on the specific type of refinance you choose. Here are the main guidelines for a USDA Streamlined-Assist Refinance and a USDA Streamlined Refinance.
USDA Streamlined-Assist Refinance qualifications
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The refinance must reduce the monthly payment by at least $50
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Borrowers can finance loan costs, including the upfront USDA guarantee fee, into the new balance
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Borrowers must show on-time payments of the current loan for 12 consecutive months
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You must use the home as your primary residence
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Your income can’t exceed the USDA’s income limits
USDA Streamlined Refinance qualifications
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You must meet the program’s credit requirements
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Borrowers must make on-time payments for 180 consecutive days before being eligible to refinance
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Borrowers must wait a minimum of 12 months before moving forward with a new loan
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The home must be your primary residence
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Your household income must be within the program’s income limits
When does it make sense to refinance a USDA loan?
It’s worth considering a refinance USDA loan if you can lower your rate and monthly payment. Refinancing with a lender like American Financing can save you hundreds of dollars a month, plus tens of thousands in the long run. You can put those extra funds toward other financial goals, such as paying off high-interest debt or improving your home.
As we mentioned above, you can refinance your USDA loan even if your finances aren’t in great shape. While other loan programs have stricter credit or income guidelines, USDA options offer flexibility. More relaxed lending requirements mean fewer headaches during what many borrowers often deem a stressful process.
Additionally, when you opt for a USDA Streamlined-Assist Refinance, you can refinance your property if you have minimal equity. Since there’s no home appraisal involved, you can discuss USDA refinance strategies even if the new loan amount exceeds your home’s value. Refinancing, in this instance, keeps you from being ‘underwater’ on your mortgage (owing more on your home than it’s worth).
