Fannie Mae vs Freddie Mac: What is the difference?

You may hear the names Fannie Mae and Freddie Mac often. But what are they exactly?

They are both Government Sponsored Enterprises (GSE) in the home mortgage business. They are very similar. they both buy mortgages on the secondary market, pool them, and then sell them as mortgage-backed securities to investors in the open market. The way they handle government guarantees, subsidies and direct government funding are the same.

Their main difference is that Fannie Mae primarily buys mortgages issued by banks while Freddie Mac buys mortgages issued by thrifts.

Fannie Mae was a federal program that was created in 1938 as part of the New Deal, and Freddie Mac was chartered by Congress as a private corporation in 1970. Fannie was monopolizing the mortgage market as a government agency until it became a private corporation in 1968. Freddie Mac was brought into the market to compete with Fannie Mae's monopoly so that lenders and bankers would have two options instead of just one. Today, Fannie Mae is a privately-owned corporation while Freddie Mae is a stockholder-owned corporation.

Fannie Mae allows guarantee on multiple properties owned by a single person up to 10 units, while Freddie Mac allows guarantee on no more than 4 units. They do have a slight difference in rules regarding down payments as well. Fannie Mae asks as little as 3% from home loan borrowers and Freddie Mac requires at least a 5% down payment, which means that it does not allow loans of more than 95% loan-to-value.

They both have a common goal in mind: to provide affordability to homeowners. They aim to provide a stability to the mortgage market so that it can continue to function. While Fannie and Freddie compete with each other in the same market, they really are very similar and have the same basic foundation and goals to help you, as a homeowner, get the most affordable loan that you can. Ask your loan officer what is best for you.

Understanding the Terms: "APR" and "Interest Rate"

You'll see an interest rate and an Annual Percentage Rate (A.P.R.) for each mortgage loan you see advertised. The easy answer to "why" is that federal law requires the lender to tell you both.

The A.P.R. is a tool for comparing different loans, which will include different interest rates but also different points and other terms. The A.P.R. is designed to represent the "true cost of a loan" to the borrower, expressed in the form of a yearly rate. This way, lenders can't "hide" fees and upfront costs behind low advertised rates.

While it's designed to make it easier to compare loans, it's sometimes confusing because the A.P.R. includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. And since the federal law that requires lenders to disclose the A.P.R. does not clearly define what goes into the calculation, A.P.R.s can vary from lender to lender and loan to loan.

The A.P.R. on a loan tied to a market index, like a 5/1 ARM (adjustable mortgage rate), assumes the market index will never change. But ARMs were invented because the market index changes and makes fixed rate loans cheaper or more expensive to make -- that's why they're variable rate in the first placed!

So, A.P.R.s are at best inexact. The lesson is that A.P.R. can be a guide, but you need a mortgage professional to help you find the truly best loan for you.

Note when you're browsing for loan terms that the A.P.R. will not tell you about balloon payments or prepayment penalties, or how long your rate is locked. Also, you'll see that A.P.R.s on 15-year loans will carry a higher relative rate due to the fact that points are amortized over a shorter period of time