What is a Fixed Rate Mortgage?

Buying a home can feel overwhelming, especially when it comes to understanding all the mortgage terminology. Do you want a fixed-rate mortgage or an adjustable-rate mortgage? Once you’ve figured that out, you’ll need to decide on the best loan term—15 years, 30 years, or somewhere in between.

To make the right choice, it’s crucial to understand your mortgage options. If you prefer stability and predictability in your payments, a fixed-rate mortgage might be your ideal choice. Here’s everything you need to know about fixed-rate mortgages and how they work.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a home loan where the interest rate remains the same throughout the entire loan term. This means your principal and interest payments will never change, giving you a stable, predictable monthly payment.

Regardless of how the market shifts, your interest rate stays locked in, making fixed-rate mortgages one of the most popular options in the U.S.

How Does a Fixed-Rate Mortgage Work?

The concept behind fixed-rate mortgages is simple: the interest rate is set and does not fluctuate. This predictability can be reassuring, particularly for buyers looking for stability in their budget.

Pros and Cons of Fixed-Rate Mortgages

Pro: Consistent Payments for Easier Budgeting The biggest benefit of a fixed-rate mortgage is the consistency in monthly payments. You’ll know exactly how much you need to pay toward your mortgage principal and interest each month, which makes budgeting easier. However, keep in mind that while your loan payments remain the same, costs like homeowners insurance and property taxes can fluctuate. These changes may impact your total monthly payments, but they are outside your lender’s control. Typically, these expenses are held in an escrow account by your lender and paid on your behalf when due, offering convenience and peace of mind.

Pro: Full Amortization Over the Loan Term With a fixed-rate mortgage, your loan is fully amortized over its term. For instance, if you have a 30-year fixed-rate mortgage, by the end of the term, your loan will be completely paid off as long as you make your payments on time.

Con: Higher Initial Costs Fixed-rate mortgages generally start with a slightly higher interest rate compared to adjustable-rate mortgages (ARMs). However, in exchange for a higher rate, you gain peace of mind from knowing that your rate will never change throughout the loan’s duration.

Popular Fixed-Rate Mortgage Terms 30-Year Fixed-Rate Mortgage A 30-year fixed-rate mortgage is the most common option, offering the lowest monthly payments due to the longer repayment term. While the interest rate is usually a bit higher than a shorter-term loan, the extended term keeps monthly payments more manageable for many borrowers. This option works well for buyers who prioritize lower monthly payments over saving on interest in the long run.

15-Year Fixed-Rate Mortgage: A 15-year fixed-rate mortgage offers lower interest rates and allows you to pay off your loan in half the time, resulting in significant interest savings over the life of the loan. However, the monthly payments will be higher compared to a 30-year mortgage.

Comparing 30-Year vs. 15-Year Mortgages Let’s compare a $250,000 mortgage at an 8% interest rate:

• 30-Year Loan: You’ll pay about $328,909 in interest over the life of the loan, with a monthly payment around $1,467.
• 15-Year Loan: The interest total drops to $144,085, but your monthly payment increases to around $1,911.

While the 15-year loan results in less interest paid overall, the 30-year option is more budget-friendly on a monthly basis. Choosing between these options depends on your financial situation and how much you can comfortably afford each month.

Other Fixed-Rate Mortgage Terms

Some lenders offer fixed-rate mortgages with terms ranging from 8 to 30 years, allowing more flexibility. For example, a 20-year mortgage could offer a balance between the affordability of a 30-year loan and the interest savings of a 15-year loan.

Fixed-Rate vs. Adjustable-Rate Mortgages (ARMs)

When deciding between a fixed-rate mortgage and an ARM, consider your long-term plans. ARMs offer a lower introductory rate, but after that initial period, your rate may adjust based on market conditions. If you plan to stay in your home for the long term, a fixed-rate mortgage offers stability, while an ARM could make sense for shorter stays.

Is a Fixed-Rate Mortgage Right for You?

If you value consistent payments and are buying during a time when interest rates are low, a fixed-rate mortgage may be the best option for you.

The Bottom Line: Fixed-Rate Mortgages Lock in Your Rate for Good. Ultimately, the type of mortgage that’s right for you will depend on your unique financial goals and how long you plan to stay in your home.