The interest rate on your USDA loan will determine your mortgage’s overall cost and monthly mortgage payments. Lower USDA interest rates mean lower monthly payments and lower interest charges throughout the lifespan of your mortgage. Even saving a few dollars every month quickly adds up over a 30-year USDA mortgage.
USDA loans are known for their competitive interest rates, which are often lower than those available for conventional mortgages. This is one of the main benefits that make USDA loans highly attractive for eligible borrowers.
Let’s examine how interest rates work on USDA loans and how they affect the overall monthly payment.
What Affects USDA Loan Rates?
USDA loan rates today, like other mortgage rates, are influenced by many factors.
The base USDA loan interest rate is tied to current market conditions and economic indicators. For example, as of September 2024, the base rate in the United States is 5.5%. This rate is determined by the Federal Reserve System, the United States’s central bank.
In addition to that rate, banks have to add their own costs and compute other individual factors such as the borrower’s credit score, debt-to-income ratio, and loan terms.
Picture current USDA mortgage rates as representative of a borrower’s creditworthiness. Borrowers with higher credit scores and lower debt-to-income ratios may qualify for more favorable rates because lenders perceive them as financially stable and responsible. Conversely, borrowers with less-than-stellar credit scores and accumulated debts are perceived as risky because their credit history and current financial situation are shaky.
Fixed Interest Rates for USDA Loans
It’s good to remember that USDA loans offer only fixed-rate mortgages. This means that once your interest rate is set at the beginning of your loan, it remains constant throughout the life of the mortgage.
Fixed interest rates provide stability and predictability in your monthly payments: you know how much your mortgage payments will be, so you can program your finances beforehand. Fixed interest rates protect you from potential interest rate increases in the future. However, you won’t benefit from the reduction if interest rates drop.
How USDA Interest Rates Are Calculated
Lenders will calculate your interest rate, taking into consideration several features.
They start with a base rate, often tied to a financial index. Then, they add a margin based on the lender’s costs and assessment of risk. That’s where DTI and credit scores come into place.
For USDA loans, this risk assessment takes into account the government guarantee, which often results in a lower rate compared to conventional loans.
How Interest Rates Affect Your USDA Mortgage
Your interest rate has a significant impact on your loan.
Monthly mortgage payment
First and foremost, it directly affects your monthly payment. A lower interest rate means a lower monthly payment which makes the loan more affordable over time. For example, on a $200,000 loan with a 30-year term, the difference between a 3% and a 4% interest rate could mean a difference of about $100 in your monthly payment.
Interest charges over the lifetime of a mortgage
Your interest rate affects the total amount you’ll pay over the life of the loan.
Even a small difference in interest rate can result in thousands of dollars saved or spent over a 30-year mortgage term. For instance, using the previous example, the 1% difference in rate could mean a difference of over $35,000 in total interest paid over the life of the loan. When seen in this light, even minute differences in interest rates can make a significant impact.
Building equity
The interest rate also influences how quickly you build equity in your home.
With a lower interest rate, a larger portion of your monthly payment goes toward paying down the principal balance of your loan, especially in the early years of the mortgage. This means you build equity faster. Why does equity matter? If you plan to sell your home or refinance in the future, higher equity will come in handy.
Annual Percentage Rate (APR)
While the interest rate is important, you should also consider the Annual Percentage Rate (APR), which includes the interest rate plus other loan costs such as mortgage insurance and closing costs.
The APR provides a more comprehensive view of the total cost of the loan.
Interest Rates for Your USDA Loan
USDA loans offer competitive interest rates, which can positively impact the amount of money you spend on your mortgage payments.
Shop around and compare offers from multiple lenders. Each lender may offer slightly different rates and terms. Here at Society Mortgage, we offer excellent interest rates on your USDA loan. Our Loan Officers will be happy to assess your financial situation and offer a competitive interest rate on your loan. Our goal is to help you achieve your homeownership dreams.
Contact Society Mortgage today to talk to one of our mortgage specialists!
