The 30-year fixed-rate loan is one of the more popular mortgage programs in America. The homeowner knows the monthly payment will not change over the life of the loan. And because there are 360 payments, the overall monthly payment is affordable. When a homeowner obtains a 30-year conventional mortgage and puts less than 20 percent down, the lender requires private mortgage insurance (PMI) coverage on the loan.
Freddie Mac and Fannie Mae
The two largest conventional mortgage investors are Freddie Mac and Fannie Mae. Although these companies do not lend directly to the public, they purchase loans made by banks and mortgage lenders. They set the conventional lending guidelines, which include requiring PMI for any loan with less than a 20 percent down payment or less than 20 percent equity.
30-Year Fixed-Rate Mortgage
When a homeowner finances a home with a 30-year fixed-rate mortgage, he pays a slightly higher rate for the convenience of payment security and a long amortization period, which lowers the monthly payment when compared to 15- or 20-year loans.
Private Mortgage Insurance
Several companies provide PMI to lenders. Each company sets its own guidelines, which usually exceed the lender’s loan approval guidelines. If the homeowner defaults on the mortgage and the lender forecloses, the PMI company repays the lender's losses. Mortgage companies expect to sell foreclosed homes for less than their full value. They rely on PMI to reimburse the difference between how the foreclosed home sale price and the balance of the mortgage, plus the costs of foreclosure and selling the home.
PMI can cost the homeowner hundreds of dollars a month, depending on the loan specifics. The government requires conventional lenders remove PMI at the homeowner’s request once the home has at least 20 percent equity. The lender must automatically remove the PMI once the home has 22 percent equity. This could drop the total payment required on a 30-year conventional mortgage significantly with very little expense to the homeowner.
- Bankrate: Differences between FHA and conventional mortgages; Dr. Don Taylor
- Federal Housing Finance Agency. "FHFA Announces Maximum Conforming Loan Limits for 2020." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "What Is a Jumbo Loan?" Accessed Mar. 10, 2020.
- U.S. Department of Housing and Urban Development. "Let FHA Loans Help You." Accessed Mar. 10, 2020.
- Office of Public and Intergovernmental Affairs. "Federal Benefits for Veterans, Dependents and Survivors." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "Seven Factors That Determine Your Mortgage Interest Rate." Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "What Is a Loan-to-Value Ratio and How Does It Relate to My Costs?" Accessed Mar. 10, 2020.
- National Credit Union Administration. "Homeowners Protection Act (PMI Cancellation Act)." Accessed Mar. 10, 2020.
- Federal Reserve Bank of St. Louis Review. "A Primer on the Mortgage Market and Mortgage Finance," Page 37. Accessed Mar. 10, 2020.
- Consumer Financial Protection Bureau. "With an Adjustable-Rate Mortgage (ARM), What Are Rate Caps and How Do They Work?" Accessed Mar. 10, 2020.
David Rouse, currently residing in Raleigh, N.C., has been writing and teaching home owners about the mortgage industry since 1997. Rouse has written training manuals for mortgage professionals and conducted informational first-time home-buyer seminars, providing make-sense answers for a long and confusing process. He studied at Western Kentucky University.