Fixed-rate USDA loans are $0 down, 15- or 30-year mortgages that are intended to help our rural communities grow and thrive. These loans are only eligible on homes in USDA-defined rural areas which can be anywhere from open country to the outskirts of major cities. Around 97% of the entire country falls into a rural-defined area, so finding a qualifying home isn’t difficult. The mortgage rates on these loans are federally-mandated and are based on the going prices of bonds. At the time of closing, a loan will be locked at the lowest going rate.
Fixed-rate means the mortgage rate will not increase or decrease over the amortization of the loan. Mortgage rates adjust multiple times every day, so buyers with a fixed-rate USDA loan can feel secure knowing their rate will not change. Past loans originated during weaker economies were sold at higher, adjustable rates with the promise of a potential decrease over time. Although those rates might have seen a decrease after the economy recovered from the recession, they are just as likely to see an increase over time. It is out of the buyers’ control. With current rates lower than they have been in years, choosing a fixed-rate program is the wisest choice. Because Fixed-rate USDA loans are guaranteed by the government, the mortgage rate is usually lower than with other loan programs, giving buyers even more confidence in their decision.
If rates do decrease, buyers with a Fixed-rate USDA loan have the option to refinance after they’ve owned their home for 12 months. There is no penalty for refinancing, and in some cases an appraisal and home inspection may not be required. As with original Fixed-rate USDA loans, the closing costs may be financed into the loan. Many homeowners do refinances to lower their rates and change the terms of their loans, but some refinance their home to take out cash for home improvements or to pay down other debt. The guidelines for cash-out refinances are the same as for no cash-out refinances, although that is a better option if you have owned your home for several years because you will have more equity invested.
Getting preapproved for a Fixed-rate USDA loan is easy. Only mortgage lenders approved by USDA can offer the Fixed-rate USDA loan. Your credit score must be at least 620, which is 20 points lower than what is required from most other loan programs. You need to have 2 years of work history and be able to prove that you can afford a monthly mortgage payment. You can’t have any outstanding federal debt or have an open judgement against you. Finally, the home you choose must be in a rural-defined area. The Fixed-rate USDA loan is the best option if you want the security of a low, fixed rate, the freedom of a down payment, and the ability to change the terms of your loan with no penalties.