Home Sweet Home. In 30 Years
A 30-year fixed rate home loan is a mortgage that has a set interest rate and is scheduled to be paid off over a term of 30 years. The payments do not change over the life of the loan. A 30-year fixed rate mortgage is available to qualified borrowers in all types of mortgages, including new purchases and refinancing of your home.
Thirty-year fixed rate mortgage finance programs offer stability to a budget-conscious borrower. It eases qualifying for the loan since the longer term of the mortgage causes the monthly payment to be lower than a 15-year mortgage. Loan repayment is set up on an amortization schedule in which repayment of interest and principal are sufficient to retire the loan when the final payment is made. Making additional payments will shorten the term and retire the loan sooner.
The 30-year fixed mortgage was introduced in the United States in 1934 during President Roosevelt's "New Deal." The economy had flattened due to the Great Depression. The building industry had shut down, the banking system was failing and thousands were out of work. Many lost their home to foreclosure. Banks would lend money to buy a home only to those who could make a 50 percent down payment. President Roosevelt introduced the Federal Housing Authority loan program carrying insurance to cover losses to the lender if the borrower defaulted. The new FHA loan was a 30-year fixed rate program for those who could make only a small down payment. It put the market back on its feet as people went back to work and bought affordable homes.
Government Loan Programs
A 30-year fixed rate mortgage is still available to qualified borrowers through the FHA, which does not fund the loan but insures it. Borrowers must make a minimum 3.5 percent down payment. Because of the required mortgage insurance premium, the lender can be assured repayment if the borrower defaults. The Veteran's Administration offers a 30-year fixed rate mortgage to those who have served in the military. The loan does not require a down payment or mortgage insurance. The U.S. Department of Agriculture (USDA) Rural Mortgage program offers a 30-year fixed rate loan similiar to that of the FHA. The USDA program serves low-income borrowers in rural communities in an effort to help build sparsely populated areas of the United States. This loan does not require a down payment and is more lenient in debt ratios than other loans available.
Conventional lenders, such as Fannie Mae and Freddie Mac, offer 30-year fixed rate programs, but in a purchase contract that requires a minimum of 10 percent down payment. Private mortgage insurance is required to protect the lender from losses in case of default. No private mortgage insurance is needed if the borrower makes a 20 percent down payment.
The economic recession that deepened in 2008 resulted in the tightening of mortgage guidelines. In 2009, most loan approvals are being done with credit risk strategies in place to prevent foreclosures. A borrower's credit report is looked at harder, score requirements are now higher and debt ratios are closely scrutinized. Employment and salary history is checked. However, the 30-year fixed rate program will continue to be a staple in the home mortgage industry since its longer term keeps payments low and affordable.