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30 Year Fixed Rate Loan
A standard 30 year fixed rate loan has a fixed interest rate, a fixed
monthly payment, and is fully amortizing over a 30 years. These loans are commonly
referred to as a "Fannie Mae" or a "Freddie Mac" loan (in reference to
the company that will purchase the loan on the secondary mortgage market from the
lender). A portion of each monthly payment covers the interest due on the loan. The
remaining portion is applied toward the reduction of the principal balance. Regular
payments systematically reduce the loan balance until the loan is paid in full.
During the first 10 years, more than 84% of the monthly payment is
applied to interest and therefore is tax deductible. Pay-down of principal occurs slowly.
It is not until the 22nd year that 50% of the principal balance is paid off. Therefore, a
30-year is appropriate for borrowers for whom an affordable monthly payment is more
important than the rapid reduction of principal.
Advantages |
Disadvantages |
| The main advantage of the
traditional fixed-rate mortgage is certainty that the rate, monthly principal and interest
payments will not go up. The payment stays the same for 30 years. |
If overall interest rates go down
as they did in the early 1990s, the rate on a traditional mortgage will not go down with
them. To take advantage of lower interest rate levels, the borrower would have to
refinance, and that may cost thousands of dollars. |
Loan Limits
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$300,700 1 Unit Properties |
Underwriting
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Standard
FNMA/FHLMC underwriting guidelines |
Mtg. Insurance
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Required on all loans with a LTV > 80%
(cash-out refi’s w/ LTV > 75%) |
Documentation
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Standard documentation required from borrower |
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