The Jones family’s loan:
- Fannie Mae-guaranteed 30-year fixed-rate mortgage
- Interest rate: 3.93%
Their rate is low because the bank making their loan knows Fannie Mae will guarantee the payments if the Joneses get into financial trouble. The Fannie Mae guarantee makes their loan less risky for the bank, so it tells the Joneses they can put down just 5% on their new home. They opt to put down 20%, instead, to avoid PMI.
The Smith family’s loan:
- Fixed-rate mortgage that isn’t guaranteed by Fannie Mae or Freddie Mac
- Interest rate: 4.93%.
They don’t have the option of putting down just 5%. Their lender gets its mortgage funding from a Wall Street firm that wants a big downpayment as security against the loan and charges a higher interest rate because there’s no guarantee on the loan.