Introduction to Subsidy Recapture
Subsidy recapture is an important concept for people with USDA direct loans. This blog post will explain what subsidy recapture is, how it works, and what you need to know. There is also a calculator at the top of this post to help you estimate your subsidy recapture amount.
This is not an official calculation and only to be used for informational purposes.
What is Subsidy Recapture?
Subsidy recapture applies to USDA loans that help people buy homes. When you get help to make your monthly payments smaller, this is called a subsidy. You need to pay this subsidy back in certain situations. This process is called subsidy recapture.
When Do You Have to Pay Subsidy Recapture?
You may have to pay the subsidy back when:
- You sell your house.
- You give the title of your house to someone else.
- You move out of your house.
- You pay off the loan but still live in the house (though you can wait to pay until you sell or move out).
How is Subsidy Recapture Calculated?
The calculation involves several steps:
- Current Market Value: The value of your house when you pay off the loan.
- Original Equity: The value of your house when you got the loan, minus any other loans and the original loan balance.
- Amount of Subsidy Received: The total amount of help you got to make your payments smaller.
The amount you pay back is the smaller of the subsidy received or a portion of the increase in your house’s value. This is calculated by subtracting various costs (like other loans and closing costs) from the current market value.
Example Calculation
Here’s an example to help you understand:
- Current market value: $200,000
- Amount of other loans and costs: $158,700 (total of other loans, closing costs, and other fees)
Value appreciation: $200,000 – $158,700 = $41,300
Recapture percentage: 50% (this is a common percentage used) OR it will be 75% of the subsidy received assuming early loan payoff, whichever may be lower.
Recapture amount: $41,300 x 50% = $20,650, but not more than the subsidy you received.
Options for Paying Subsidy Recapture
When paying off the loan, you have two options:
- Pay the subsidy recapture when you pay off the loan: You may get a 25% discount on the amount you pay back.
- Wait to pay the subsidy recapture: You can wait until you sell or move out, but no discount will apply.
Conclusion
Understanding subsidy recapture is important so you are prepared for any payments you need to make. Use the calculator above to find out an estimated amount of how much you might have to pay back. For more help, you can visit the USDA Rural Development website or call their customer service.