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8 min read Mar 28, 2023

Fixed-Rate Mortgage: Everything You Need to Know

Fixed-rate mortgages are the most popular type of home loan representing over 75% of all home loans. In this article, we’ll explain what a fixed-rate mortgage is, how it works, its pros and cons and whether it’s for you.

What Is A Fixed-Rate Mortgage?

A fixed-rate mortgage is a type of mortgage loan where the interest rate stays the same throughout the term of the loan. This means that you will have a monthly fixed-rate mortgage payment that remains unchanged for the entire loan duration.

The most common fixed loan term is 30 years, but 15-year and 20-year fixed-rate mortgages are also available.

How Does A Fixed-Rate Mortgage Work?

When you take out a fixed-rate mortgage, you agree to pay a set interest rate for the entire loan term. Market conditions determine these rates and they can vary depending on several factors. These include your credit score, the loan amount, and the loan term.

Your monthly payment is calculated using the fixed rate, loan amount, and loan term.

The payment has two components: principal and interest. The amount of the loan that you borrow is called the principal amount, and the cost of borrowing is called interest. A portion of your payment goes towards paying off the principal, while the rest goes towards paying the interest.

How Long Are Fixed-Rate Mortgage Terms?

Fixed-rate mortgages are available in a variety of terms, but the most common terms are 30 years and 15 years. A 30-year fixed-rate mortgage offers the lowest monthly payment. But it has a higher interest rate and costs more in interest over the life of the loan. A 15-year fixed-rate mortgage has a higher monthly payment but a lower interest rate and costs less in interest over the life of the loan.

30-Year Fixed Vs. 15-Year Fixed, By The Numbers

Let’s look at an example to see the difference between a 30-year fixed-rate mortgage and a 15-year fixed-rate mortgage. Assume you are taking out a $200,000 mortgage with a fixed interest rate of 3%. Here’s what your monthly payments would look like:

30-year fixed-rate mortgage: $843 per month
15-year fixed-rate mortgage: $1,389 per month
The 15-year fixed-rate mortgage has a higher monthly payment, but you will pay off the loan in half the time. You can save over $80,000 in interest over the life of the loan.

Types of fixed-rate mortgages

The most common types of fixed-rate mortgages:

  • Conventional fixed-rate mortgages: This is the most common type of fixed-rate mortgage, and available with most lenders. Conventional fixed-rate mortgages have a set interest rate and monthly payment for the entire life of the loan, which is typically 15, 20, or 30 years.
  • Jumbo fixed-rate mortgages: A jumbo fixed-rate mortgage is a loan that exceeds the conforming loan limits. These loans typically have higher interest rates than conventional fixed-rate mortgages. However, they can be a good option for borrowers who need to borrow more than the conforming loan limit.
  • FHA fixed-rate mortgages: FHA fixed-rate mortgages are backed by the Federal Housing Administration. They help lower-income and first-time homebuyers qualify for a mortgage. These loans typically have more lenient credit requirements and lower down payment requirements than conventional fixed-rate mortgages.
  • VA fixed-rate mortgages: VA fixed-rate mortgages are available to veterans and active-duty military members. They are guaranteed by the Department of Veterans Affairs. These loans typically offer low-interest rates and no down payment requirements, making them an attractive option for eligible borrowers.
  • USDA fixed-rate mortgages: USDA fixed-rate mortgages are designed to help borrowers in rural and suburban areas who have low to moderate incomes. These loans are guaranteed by the United States Department of Agriculture and offer low-interest rates and no down payment requirements.

Pros And Cons Of Fixed-Rate Mortgages

Like any type of mortgage, fixed-rate mortgages have both pros and cons.

Pros:

  • Predictability: With a fixed-rate mortgage, you know exactly how much your monthly payment will be for the entire term of the loan. This makes budgeting and planning for the future easier.
  • Stability: The fixed interest rate protects you from market fluctuations and rising interest rates.
  • Simplicity: Fixed-rate mortgages are straightforward and easy to understand, making them a good choice for first-time homebuyers.

Cons:

  • Higher Interest Rates: Fixed-rate mortgages tend to have higher interest rates than adjustable-rate mortgages (ARMs) because you are paying for stability and predictability.
  • Limited Flexibility: If interest rates drop significantly, you cannot take advantage of the lower rates without mortgage refinancing. This can be costly and time-consuming.
  • Higher Upfront Costs: Fixed-rate mortgages typically require a larger down payment and have higher closing costs than ARMs.

What Is The Difference Between Fixed-Rate And Adjustable Rate Mortgages (ARMs)?

When shopping for a mortgage, borrowers have two main options: fixed-rate mortgages and adjustable-rate mortgages (ARMs). While both types of mortgages can help you purchase a home, they have some key differences that can impact your monthly payments and the overall loan cost.

  • Fixed-Rate Mortgages: A fixed-rate mortgage is a home loan with a set interest rate that stays the same throughout the life of the loan. This means that your monthly mortgage payment will remain the same, regardless of changes in the broader interest rate market. Fixed-rate mortgages typically come with loan terms of 15, 20, or 30 years, and their interest rates depend on the borrower’s credit score, loan amount, and other factors.
  • Adjustable Rate Mortgages (ARMs): An adjustable-rate mortgage is a home loan where the interest rate can change over time based on a set index or market rate. ARMs typically have an initial fixed-rate period of 5, 7, or 10 years, after which the interest rate may adjust up or down depending on market conditions. This means that your monthly mortgage payment could fluctuate, potentially leading to higher payments and greater financial uncertainty.

Pros and Cons of Fixed-Rate Mortgages vs. ARMs: The main advantage of a fixed-rate mortgage is that it provides stability and predictability. With a fixed-rate mortgage, you always know what your monthly mortgage payment will be, which can help with budgeting and financial planning. In addition, fixed-rate mortgages can provide protection against rising interest rates.

On the other hand, adjustable-rate mortgages can sometimes offer lower initial interest rates than fixed-rate mortgages. This can be an advantage for borrowers who plan to sell or refinance their home before the initial fixed-rate period ends. However, ARMs can also be riskier, since there is no guarantee that your monthly payment won’t increase in the future.

Is A Fixed-Rate Mortgage Right For Me?

Deciding whether a fixed-rate mortgage is right for you depends on your individual financial situation and goals. Here are some factors to consider when deciding if a fixed-rate mortgage is the best choice for you:

  • Monthly budget: If you prefer to have a consistent monthly payment that won’t change over the life of the loan, a fixed-rate mortgage can provide the stability and predictability you need. With a fixed-rate mortgage, you can budget for your mortgage payment with confidence, knowing that it won’t fluctuate based on changes in interest rates.
  • Long-term plans: If you plan to stay in your home for several years or more, a fixed-rate mortgage can provide long-term stability and predictability. With a fixed-rate mortgage, you can lock in a low-interest rate for the life of the loan, providing peace of mind and potentially saving you thousands of dollars in interest payments over the years.
  • Risk tolerance: If you prefer to avoid financial risk and uncertainty, a fixed-rate mortgage may be the best choice for you. You will know exactly what your monthly payment will be for the entire life of the loan. This can provide a sense of security and stability.
  • Interest rate trends: If you believe that interest rates are likely to rise in the future, a fixed-rate mortgage can provide protection against future rate increases. With a fixed-rate mortgage, you can lock in a low-interest rate that won’t change even if market rates go up.

Ultimately, the decision of whether a fixed-rate mortgage is right for you depends on your financial situation, goals, and risk tolerance. Working with a trusted lender or financial advisor can help you weigh the pros and cons of different mortgage options and make an informed decision.

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