If you have a USDA loan and want to lower your monthly mortgage payments, you may be interested in refinancing your loan. Refinancing can help you save money on interest, reduce your loan term, or switch from an adjustable-rate to a fixed-rate mortgage.
However, refinancing can also be a hassle. You may have to go through a new appraisal, credit check, income verification, and closing costs. That’s why the U.S. Department of Agriculture (USDA) offers a streamlined refinance option for eligible borrowers who want to refinance their existing USDA loans with less paperwork and hassle.
In this article, we’ll explain what USDA streamline refinance is, how it works, who can qualify, how to apply, and what are the costs and savings involved. By the end of this article, you’ll have a better understanding of whether USDA streamline refinance is right for you and how to get started.
What is USDA Streamline Refinance?
USDA streamline refinance is a mortgage refinancing option that lets you replace your current USDA loan with a new one at a lower interest rate. The main benefit of USDA streamline refinance is that it simplifies the refinancing process by waiving some of the requirements that apply to regular refinances.
There are two types of USDA streamline refinance: USDA streamline and USDA streamlined assist. Both types are available to homeowners who have either a USDA direct loan (a loan issued directly by the USDA) or a USDA guaranteed loan (a loan issued by a private lender and backed by the USDA).
The main difference between the two types is that USDA streamline requires you to show your credit score and debt-to-income ratio (DTI) to qualify, while USDA streamlined assist does not. Also, USDA streamline allows you to add or remove someone from the mortgage, while USDA streamlined assist only allows you to add someone or remove someone who has died.
Both types of USDA streamline refinance have some common benefits and requirements, such as:
- No new appraisal is required, unless you have a direct loan and received a subsidy
- No home inspection is needed
- The new loan must have a fixed interest rate and a term of 30 years or less
- The new loan must result in a tangible benefit, which means a monthly payment reduction of at least $50
- You must have made at least 12 consecutive on-time payments on your current loan
Who is Eligible for USDA Streamline Refinance?
To be eligible for USDA streamline refinance, you must meet the following criteria:
- You must have an existing USDA loan as your primary residence
- Your property must be located in an eligible rural area as defined by the USDA
- You must be current on your mortgage payments and have no late payments in the past 12 months
- You must not have refinanced your loan under the USDA streamline program in the past 12 months
To check if your property is in an eligible rural area, you can use the USDA eligibility map. To check if you have an existing USDA loan, you can look at your mortgage statement or contact your lender.
How to Apply for USDA Streamline Refinance?
The application process for USDA streamline refinance is similar to that of any other refinance, except that it requires less documentation and verification.
Here are the basic steps to apply for a USDA Streamline Refinance:
- Determine if you qualify for a USDA streamline refinance. The main requirements are that you have an existing USDA home loan, your current loan payments are up to date, and your home still meets USDA eligibility (in a rural area, modest home value).
- Gather necessary documentation. This includes pay stubs, W-2s, tax returns, bank statements, and information on your mortgage, assets, debts, and property taxes.
- Find a USDA-approved lender. Many banks and mortgage lenders participate in USDA loan programs. Get loan quotes from multiple lenders.
- Complete a loan application with your chosen lender. Be prepared to pay an upfront application fee. Your lender will review your documentation, run credit checks, and appraise your home.
- Wait for loan approval. The lender will give initial loan approval if you meet all USDA requirements. Final approval comes after the new loan closes.
- Close on your new loan. At closing, you’ll sign final loan documentsand pay any closing costs, which can be rolled into your new loan amount. You may also need to pay the USDA upfront and annual fees, which are 1% and 0.35% of the loan amount, respectively. Your existing USDA mortgage will be paid off with proceeds from the new loan.
What are the Costs and Savings of USDA Streamline Refinance?
The costs and savings of USDA streamline refinance depend on several factors, such as your current interest rate, your new interest rate, your loan balance, your loan term, and your closing costs. To determine if USDA streamline refinance is worth it for you, you’ll need to calculate your break-even point and your monthly savings.
The break-even point is the number of months it takes for you to recoup the costs of refinancing with the savings from lower monthly payments. To calculate your break-even point, divide your total closing costs by your monthly savings. For example, if your closing costs are $2,000 and your monthly savings are $100, your break-even point is 20 months. This means you’ll need to stay in your home for at least 20 months to make refinancing worthwhile.
Your monthly savings are the difference between your old and new monthly payments. To calculate your monthly savings, subtract your new payment from your old payment. For example, if your old payment was $1,200 and your new payment is $1,100, your monthly savings are $100.
Here are some examples of scenarios where USDA streamline refinance can be beneficial:
- You have a high interest rate on your current loan and can lower it significantly with a new loan
- You have a long loan term on your current loan and can shorten it with a new loan without increasing your payment too much
- You have an adjustable-rate mortgage on your current loan and can switch to a fixed-rate mortgage with a new loan to avoid future rate increases
Pros and Cons of USDA Streamline Refinance Program
Before you decide to apply for USDA streamline refinance, you should weigh the pros and cons of this option and compare it with other refinancing choices. Here are some of the advantages and disadvantages of USDA streamline refinance that you should consider:
- Lower interest rate and monthly payments: By refinancing your USDA loan with a lower interest rate, you can reduce the amount of interest you pay over the life of the loan and lower your monthly payments. This can help you save money and improve your cash flow.
- No new appraisal, credit check, or income verification: Unlike regular refinances, USDA streamline refinance does not require you to get a new appraisal of your property, which can save you time and money. You also don’t need to show your credit score or debt-to-income ratio, which can make it easier to qualify if you have poor credit or high debt. Additionally, you don’t need to provide proof of income, which can simplify the application process.
- Switch from an adjustable-rate to a fixed-rate mortgage: If you have an adjustable-rate mortgage (ARM), your interest rate can change over time depending on market conditions. This can make your payments unpredictable and increase your risk of paying more interest. With USDA streamline refinance, you can switch to a fixed-rate mortgage, which has a stable interest rate and payment for the entire loan term. This can help you plan your budget and avoid future rate increases.
- Shorten your loan term or extend it to lower your payments: Depending on your financial goals, you can use USDA streamline refinance to change the length of your loan term. You can shorten your loan term to pay off your loan faster and save on interest, but this may increase your monthly payments. Alternatively, you can extend your loan term to lower your monthly payments, but this may increase the total interest you pay over the life of the loan.
- Add or remove someone from the mortgage (with USDA streamline): With USDA streamline refinance, you have the option to add or remove someone from the mortgage at closing. This can be useful if you want to include a co-borrower who can help you qualify or pay for the loan, or if you want to remove a co-borrower who is no longer involved in the property or loan. However, this option is not available with USDA streamlined assist refinance, which only allows you to add someone or remove someone who has died.
- Roll your closing costs into your new loan amount: Closing costs are the fees and charges that you pay when you finalize your refinance. They can vary depending on your lender and location, but they typically range from 2% to 5% of the loan amount. With USDA streamline refinance, you can roll your closing costs into your new loan amount, which means you don’t have to pay them upfront. However, this also means that you will increase your loan balance and pay more interest over time.
- Avoid future rate increases (with USDA streamlined assist): With USDA streamlined assist refinance, you can only refinance into a fixed-rate mortgage, which has a constant interest rate and payment for the entire loan term. This can help you avoid future rate increases that may occur with an adjustable-rate mortgage (ARM), which has a variable interest rate that can change over time depending on market conditions.
- No cash-out refinance or equity extraction: A cash-out refinance is a type of refinance that allows you to take out some of the equity in your home as cash. You can use this cash for various purposes, such as home improvements, debt consolidation, or emergency expenses. However, USDA streamline refinance does not allow you to do a cash-out refinance or take out any equity from your home. You can only do a rate-and-term refinance, which means that you change the interest rate and/or term of your loan without changing the loan amount.
- USDA upfront and annual fees: Like all USDA loans, USDA streamline refinance loans are subject to an upfront fee and an annual fee that are paid to the USDA. The upfront fee is 1% of the loan amount and can be rolled into the new loan amount. The annual fee is 0.35% of the outstanding loan balance and is paid monthly as part of your mortgage payment. These fees are used by the USDA to fund its rural housing programs and cover its losses from defaulted loans. However, these fees also increase the cost of refinancing and reduce the savings from lower interest rates.
- Tangible benefit requirement: To qualify for USDA streamline refinance, you must show that refinancing will result in a tangible benefit for you. The USDA defines tangible benefit as a monthly payment reduction of at least $50. This means that refinancing must lower your principal, interest, real estate taxes, and homeowners insurance by at least $50 per month. If refinancing does not meet this requirement, you will not be eligible for USDA streamline refinance.
- On-time payment history requirement: To be eligible for USDA streamline refinance, you must have made at least 12 consecutive on-time payments on your current USDA loan. This means that you cannot have any late payments or delinquencies in the past 12 months. If you have any payment issues on your current loan, you will not be able to refinance with USDA streamline refinance.
- Same type of USDA loan requirement: With USDA streamline refinance, you can only refinance into the same type of USDA loan that you currently have. This means that if you have a USDA direct loan, you can only refinance into another USDA direct loan. If you have a USDA guaranteed loan, you can only refinance into another USDA guaranteed loan. You cannot switch from one type of USDA loan to another with USDA streamline refinance.
USDA streamline refinance is a great option for homeowners who have an existing USDA loan and want to lower their monthly payments with less hassle. By refinancing with USDA streamline, you can take advantage of lower interest rates, shorter loan terms, or fixed-rate mortgages without needing a new appraisal, credit check, or income verification.
If you’re interested in USDA streamline refinance, you should shop around for lenders that offer this program and compare their rates and fees. You should also check if you meet the eligibility criteria and if refinancing will save you money in the long run.
To learn more about USDA streamline refinance or to apply for one, you can contact a lender that offers this program or visit the USDA website for more information.