USDA loans do not require private mortgage insurance, but they do carry two government guarantee fees that serve the same purpose. You pay a 1% upfront guarantee fee at closing and a 0.35% annual fee on the remaining loan balance, collected monthly for the life of the loan. Both fund the Rural Housing Service’s backing of 100% financing, and together they usually cost less than FHA mortgage insurance or conventional PMI.
The Upfront Guarantee Fee
Every USDA purchase and refinance loan includes a one-time upfront guarantee fee. Federal regulations cap it at 3.5% of the loan amount, but the USDA has held the actual rate at 1% since fiscal year 2017.1eCFR. 7 CFR 3555.107 – Application for and Issuance of the Loan Guarantee The USDA publishes fee rates each fiscal year and can adjust them, so confirm the current rate before you apply.
On a $300,000 mortgage, the upfront fee comes to $3,000. That money goes into the fund that reimburses lenders when borrowers default, which is what allows the program to offer zero-down-payment loans.2USDA Rural Development. Single Family Housing Programs Your credit score doesn’t change what you pay. A perfect borrower and a borderline one pay the same percentage.
Most borrowers roll the fee into the loan balance instead of paying it in cash. You end up borrowing slightly more than the home’s price, but you avoid a four-figure hit on closing day. The lender has to disclose whether you’re financing the fee on your Loan Estimate, which arrives within three business days of applying.3Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
The Annual Fee
On top of the upfront charge, USDA loans carry an annual fee of 0.35% of the average scheduled unpaid principal balance.4USDA Single Family Housing Guaranteed Loan Program. Upfront Guarantee Fee and Annual Fee Notes The regulation caps this at 0.5%, so the current rate sits well below the ceiling.1eCFR. 7 CFR 3555.107 – Application for and Issuance of the Loan Guarantee
On a remaining balance of $250,000, the annual fee works out to $875 per year, or roughly $73 a month. Because the calculation tracks your outstanding balance rather than the original loan amount, the dollar cost drops slightly each year as you pay down principal. Over a 30-year term, that gradual decrease adds up compared to fee structures pegged to the original balance.
Your lender splits the annual fee into twelve equal portions and collects it through your escrow account alongside property taxes and homeowner’s insurance. You won’t write a separate check. The arrangement appears on your Closing Disclosure before you sign.3Consumer Financial Protection Bureau. TILA-RESPA Integrated Disclosure FAQs
How USDA Fees Compare to FHA and Conventional PMI
USDA fees are generally the cheapest option in the government-backed world. FHA loans charge a 1.75% upfront mortgage insurance premium and an annual premium of 0.85% for most borrowers putting less than 5% down on a 30-year loan.5U.S. Department of Housing and Urban Development. Appendix 1.0 – Mortgage Insurance Premiums Set that against USDA’s 1% upfront and 0.35% annual. On a $250,000 loan, you’d pay roughly $875 per year in USDA annual fees versus $2,125 for FHA annual insurance. That’s more than $100 a month.
Conventional loans with less than 20% down require PMI from a private insurer, and rates vary based on credit score, down payment size, and the insurer. A borrower with strong credit might pay 0.5% annually, while a thinner file could see rates above 1%. Conventional PMI has one real advantage: it can be canceled once you reach 20% equity, which USDA fees cannot.6Consumer Financial Protection Bureau. When Can I Remove Private Mortgage Insurance (PMI) From My Loan? VA loans charge a funding fee (often above 2% for first-time borrowers with no down payment) but carry no ongoing annual charge, making them the best deal for eligible veterans.
If you’re choosing between USDA and FHA for a rural property, USDA will almost always cost less. If you’re weighing USDA against a conventional loan, the answer depends on how long you plan to stay in the home and how fast you’ll build equity.
How Long the Fees Last
This is the part that catches people off guard. The USDA annual fee lasts for the entire life of the loan. It doesn’t matter how much equity you accumulate or how far your home’s value climbs. As long as you hold a USDA-guaranteed mortgage, you pay the annual fee.4USDA Single Family Housing Guaranteed Loan Program. Upfront Guarantee Fee and Annual Fee Notes
Contrast that with conventional PMI, which your servicer must cancel once the principal balance reaches 80% of the home’s original value based on the amortization schedule.7National Credit Union Administration. Homeowners Protection Act (PMI Cancellation Act) With USDA, you have two ways to stop paying the fee: pay off the mortgage, or refinance into a different loan product.
Refinancing into a conventional loan is the most common exit. Once your home’s value has risen enough, or you’ve paid down enough principal, to put you at 80% loan-to-value, a conventional refinance eliminates the annual fee permanently. That move requires a new appraisal and full underwriting, so factor those costs in. For many borrowers, the break-even point lands somewhere between years five and ten, depending on home price appreciation.
Staying in the USDA Program
If rates drop and you want to refinance but keep a USDA loan, a streamline refinance lets you do that without a new appraisal. A new upfront guarantee fee applies and can be rolled into the balance, but the total loan amount for a streamline refinance can’t exceed the original loan amount, so you’re limited to the outstanding balance, accrued interest, and the new upfront fee.8USDA Rural Development. Refinances The annual fee continues on the new loan. There’s no credit or refund for fees paid on the prior loan, so a streamline only pays off when the rate drop is big enough to swallow the new upfront cost.
Are USDA Guarantee Fees Tax Deductible?
You may have heard that USDA guarantee fees are deductible the way mortgage interest is. That was true through 2021, when the mortgage insurance premium deduction under IRC Section 163 let borrowers deduct these fees as qualified residence interest, with income phaseouts starting at $100,000 in adjusted gross income.9Office of the Law Revision Counsel. 26 U.S. Code 163 – Interest That provision expired at the end of 2021 and has not been renewed as of early 2026. Legislation to reinstate it and make it permanent has been introduced in Congress but hasn’t passed. For now, you can’t deduct USDA guarantee fees on your federal return. If Congress revives the deduction, it would apply to both the upfront and annual fees, so it’s worth watching during tax season.