USDA Guarantee Fee vs. PMI: What 0.35% Actually Costs

The fee everyone asks about

The moment I tell a buyer a USDA loan needs no down payment, a smart question usually follows: "Okay, so where is the catch?" It is a fair question, and the honest answer is the guarantee fee. Every USDA loan carries one, and it works a lot like mortgage insurance on other loan types.

The confusion is that people hear "fee" and assume it is expensive. In most cases the USDA guarantee fee costs you less than the mortgage insurance you would pay on an FHA loan, and that 0.35% number scares people far more than it should. Let me break down what it actually costs.

The two parts of the USDA guarantee fee

There are two pieces, and it helps to keep them separate.

The first is the upfront guarantee fee. It is a one-time charge of 1.00% of your loan amount, due at closing. The reason it rarely comes out of your pocket is that USDA lets you finance it into the loan. Instead of writing a check for it at the table, you add it to the amount you borrow, so the fee rises and falls with your loan size and gets repaid along with the rest of the balance.

The second is the annual fee. It is 0.35% of your average scheduled unpaid principal balance, and you pay it monthly as one-twelfth of that amount baked into your regular mortgage payment. Because it is figured on what you still owe, two things set your cost: how much you borrowed and how far you have paid the loan down. It declines a little each year as your balance drops.

Both figures have been stable since 2017 and remain in effect. They are 2025 numbers set by USDA and are subject to change.

How that compares to FHA mortgage insurance

Here is why I bring USDA up first for eligible buyers. FHA loans, the other low-down-payment option most first-time buyers consider, also carry two layers of mortgage insurance: an upfront premium and an annual premium.

The USDA annual fee of 0.35% is meaningfully lower than the FHA annual mortgage insurance premium that applies to most FHA loans. On a typical loan, that difference can translate into real money every single month, and it stacks up over the years you own the home. The upfront charges are in a similar range, and both can be financed, so the monthly annual fee is usually where USDA pulls ahead.

I always run both side by side for eligible buyers rather than assume. If you want the full comparison of the two programs beyond just insurance, our post on USDA versus FHA walks through it, and you can model your own numbers with the USDA loan calculator.

The one real difference from conventional PMI

There is one honest caveat I make sure every client hears. On a conventional loan, private mortgage insurance can come off once you reach a certain amount of equity, generally around 20% to 22%. The USDA annual fee does not work that way. It runs for the life of the loan.

That sounds worse than it plays out. Because the annual fee is only 0.35% and is calculated on a declining balance, the monthly cost is modest and shrinks over time. And many USDA buyers refinance into a conventional loan down the road once they have built equity, at which point the fee goes away entirely. But you deserve to know it does not drop off automatically the way conventional PMI can.

Why the fee exists at all

It is easy to resent a fee, so it helps to understand what it buys you. USDA guarantees roughly 90% of your loan to the lender. That guarantee is the entire reason a lender like us can offer a mortgage with no down payment to a moderate-income buyer. The guarantee fee funds that program.

In other words, that 1.00% upfront and 0.35% annual is the price of admission to a no-down-payment loan. Weighed against saving up a full down payment, most buyers find it an easy trade. The fee lets you buy now instead of saving for another three or four years while home prices and rents keep moving.

How the fee plays out on a purchase

Picture a buyer picking up a home outside Prescott Valley with a USDA loan. The 1.00% upfront fee is financed in, so it nudges the loan balance up but does not touch the cash they bring to closing. The 0.35% annual fee rides along as a small piece of each monthly payment and shrinks as the balance comes down. And they bring no down payment at all, where a conventional loan would have asked for a slice of the purchase price in cash before closing.

When buyers see it laid out that way, the fee stops looking like a catch and starts looking like the mechanism that got them into the house. When we sit down together, I run your actual price and county through both sides of that comparison so you can see the fee next to the down payment it replaces.

Can I get rid of the annual fee later?

Not directly, but you have a clean exit. The annual fee stays for the life of the USDA loan, so you cannot cancel it the way you can request PMI removal on a conventional loan once you hit an equity threshold. What many of my clients do instead is refinance into a conventional loan a few years down the road, after they have built enough equity that private mortgage insurance is not required. At that point the 0.35% annual fee disappears entirely because the USDA loan is paid off.

I do not push anyone to plan around a future refinance, because rates and your situation years from now are unknowable. But it is worth understanding that the life-of-loan fee is not a life sentence. It lasts only as long as you keep the USDA loan, and you control that.

Is the upfront fee refundable if I sell quickly?

No. The upfront guarantee fee of 1.00% is earned at closing and is not refunded if you sell or refinance soon after. That is another reason most buyers simply finance it into the loan rather than paying it in cash. Spreading that one-time 1.00% charge across the loan balance keeps your cash-to-close low and the monthly impact small. If you expect to move within a year or two, we can talk through whether USDA is still the right fit versus another program, since the upfront cost does not come back.

The bottom line on the 0.35%

The USDA guarantee fee is real, it has two parts, and it lasts the life of the loan. It is also, for most eligible Texas and Arizona buyers, cheaper on a monthly basis than the FHA insurance they would otherwise pay, and a bargain against a down payment they do not have. That is the whole story, no fine print I am hiding.

If you want to see exactly how the upfront and annual fees fit into your specific payment, that is a five-minute conversation. Take our quick eligibility quiz and I will build the numbers for your price range and county, or start with the regional overviews for Texas and Arizona.

---

Zac Cook is a licensed mortgage loan originator (NMLS #2111496) with Cook Brothers Mortgage Team, powered by Cornerstone First Mortgage, LLC (NMLS #173855). This article is for educational purposes only. It is not financial advice or a commitment to lend. USDA loan program terms are set by the U.S. Department of Agriculture and are subject to change. Cornerstone First Mortgage, LLC is not affiliated with, endorsed by, or acting on behalf of the USDA or any federal or state government agency. Not all applicants will qualify. Loan approval is subject to credit, income, and property eligibility. Equal Housing Lender.