What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a home loan with a set interest rate for the entire loan term.

When you start the homebuying process, you’ll encounter many new terms and much information. If it’s your first home, all the mortgage terminology might be new. The process starts with choosing a loan type. You’ll see applicable rates and terms for various loan types, but you’ll want to know more about loan types and how those terms apply before selecting one. Learn what a fixed-rate mortgage is, its pros and cons, and what you need to know before committing to one of these loans.

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a home loan with an interest rate that remains unchanged throughout the loan term. That means that the APR you commit to on the day you sign your mortgage agreement is what you’ll have for 10, 15, 20 or 30 years depending on the terms you select. 

You’ll know the interest and principal you must pay each month throughout the full duration of the loan, regardless of what happens with interest rates thereafter. Market changes have no impact on your loan’s interest rate. These are popular loan types because people like knowing their monthly payments throughout the loan term.

How Does a Fixed-Rate Mortgage Work?

A fixed-rate mortgage has the same interest rate for the entire loan duration, regardless of market fluctuations. This contrasts to adjustable-rate mortgages, which can fluctuate as the market changes.

With a fixed rate, you know how much you’ll pay per month in principal and interest on your loan, making these the most predictable loans. 

The loan term is how long you’ll pay on the loan. U.S. mortgages range from 10 to 30 years in 5-year increments. 30-year loans are the most popular, followed closely by 15-year loans.

If you have a 30-year $300,000 fixed-rate mortgage with a 7% interest rate, your monthly payment will be approximately $1,996 for both interest and principal. You’ll pay that $1,996 per month for 30 years, though as you get closer to paying off your loan, more of your money will go toward the principal than the interest. While your monthly payment can change due to changes in taxes or homeowners insurance, your principal and interest payments won’t change.

Pros and Cons

Get to know a fixed-rate mortgage with this list of pros and cons that the mortgages can provide.

Pros

You’ll find many benefits to fixed-rate mortgages.

• Consistent payments: With a fixed-rate mortgage, borrowers know exactly how much they owe each month for the foreseeable future.
• Transparency of interest over the term: When you sign your loan, you can see a full amortization schedule, so you’ll know exactly how much interest you’ll pay over the term.
• No prepayment penalties: You won’t be penalized if you pay off your loan early.

Cons

While you gain many benefits from a fixed-rate mortgage, be aware of these possible setbacks to this loan type.

• Higher initial rates: Adjustable-rate mortgages often offer lower interest rates at the start of the term, but fixed-rate mortgages may have higher rates initially.
• Not optimal for short-term homebuyers: If you know you’ll only be in a home for a few years, an adjustable-rate mortgage is better because you can lock in lower interest rates for the first several years of the loan. 

Borrowers lose when rates go down: When rates go down, adjustable-rate mortgages are the better place to be. But when you have a fixed-rate mortgage, the only way to take advantage of rate changes is to refinance your loan.

Types of Fixed-Rate Mortgages

Once you decide that a fixed-rate mortgage is right for you, you have many options for mortgage types. Here’s a look at each and how they work.

1. Conventional Loans (Conforming Loans)

Conventional loans can also be called conforming loans. The government sets maximum loan amounts for these loan types, often maxing out at $766,550 in most counties, though some high-cost counties have a maximum of $1,149,825. You typically need to put 20% down for these loans, or you’ll have to pay for private mortgage insurance (PMI).

2. Government-Backed Loans

These loans are designed to help certain groups afford a home. Federal Housing Authority (FHA) loans can have lower down payments and closing costs. Individuals with a 580 or higher credit score can purchase a home with just 3.5% down. Those with lower credit scores can still purchase a home but might need 10% down to qualify. 

USDA loans are available for rural areas or select suburban areas to aid low and moderate-income borrowers in buying a home. The specific qualification requirements vary based on where you’re buying.

VA loans aim to thank members of the military and their families for their service to the country. These loans do not have a minimum credit score requirement and allow buyers to finance up to 100% of the home’s price. 

3. Conforming and Nonconforming Loans

Conforming loans meet government requirements, allowing the lender to sell them to government-sponsored entities after you close the loan. Nonconforming loans are better for expensive properties or individuals with challenging credit. Generally, you should only get a nonconforming loan if you must because the lender offers less favorable terms since these loan types are riskier for them.

4. Fixed-Rate Amortized and Non-Amortized Mortgages

Amortized loans have set monthly payments that reduce your principal over time. You’ll repay the loan over the loan term. The interest you pay each month is based on the loan balance, which means you’ll pay a little less in interest and a little more in principal. 

In contrast, a non-amortized loan is one in which you pay a set amount at the end of the term but won’t have set monthly payments to help you reach that amount. Some homeowners find these loans helpful as they provide greater flexibility, especially if their income is seasonal and they need to make payments as their funds come in.

Fixed-Rate Mortgage Terms

Your ‘loan term’ refers to how long you’ll be making payments on it. Here’s a look at how fixed-rate mortgage terms work.

30-Year Fixed

Fixed-rate 30-year mortgages are the most popular and it’s easy to see why. You’ll be stretching out your large purchase over 30 years. If you buy a home in your late 20s or early 30s, you can pay it off before retirement age, making retirement a smooth process.

However, you should know that longer loan terms generally mean higher interest rates. Often, the difference isn’t enormous, but it is enough to affect the total amount of interest you’ll pay throughout the loan.

If you’re deciding between a 30-year or shorter loan term, evaluate whether you need to pay off the home faster or prefer more manageable payments.

If you took out a 30-year $300,000 mortgage with a 7% interest rate, you’ll pay $418,526.69 in interest. 

15-Year Fixed

Paying off your mortgage within 15 years can save you significant money. That’s because you’ll pay more of the loan off each month, which results in paying less interest throughout the 15 years. Plus, 15-year loans often have better interest rates compared to 20- or 30-year loans.

If you took out a 15-year $300,000 mortgage with a 7% interest rate, you’ll pay $185,367.27 in interest. That’s a savings of $233,159.42 compared to a 30-year loan.

Other Fixed-Rate Mortgage Terms

While 30-year and 15-year mortgages are the most popular, you can also find lenders that offer 10-year, 20-year and 25-year mortgages. Because these are not as popular, you might not find major rate differences. However, the shorter the loan term, the less you’ll pay in interest, so it’s worth considering what you can afford.

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

Fixed-rate and adjustable-rate mortgages are quite different. Here’s a comparison to give you more information about which might be right for you based on your financial needs.

• Duration of homeownership: You might know you’ll only be in a new home for a few years. Perhaps a job is temporarily taking you to a new area, or you know this is your starter home and want to upgrade within 5-10 years. If you’ll only be in the home for a short time, an adjustable-rate mortgage will help you get a lower interest rate in those initial years of the loan.
• Consider the ARM interest rate cap: Even if you think you’ll be in the home for a short time, evaluate the loan’s terms for the entire duration. You don’t want to realize that your starter home is good enough for you long-term but then discover that your mortgage is unaffordable. You’ll commit to interest-rate caps when you sign on the loan. Make sure you can make the monthly payments at this rate before committing to the loan.
• Shop around for your mortgage: Get multiple preapprovals to find the lender with the best terms regardless of which loan type you select. Different lenders will offer varying rates based on your unique risk factors.
• Comfort with the terms: An adjustable-rate mortgage is more of an advanced financial tool. If you don’t understand how it works, it’s probably best to opt for a fixed-rate mortgage so you don’t have any surprises you can’t handle once the initial rate period ends and you start dealing with fluctuating rates.

Compare the Best Fixed-Rate Mortgages From Benzinga’s Top Lenders

As you shop for a mortgage and request preapprovals, look into the leading lenders for fixed-rate mortgages.

Know Your Monthly Payments for as Long as You Live in the Home

The greatest benefit of a fixed-rate mortgage is that you can guarantee you know how much you’ll pay monthly for your home loan as long as you live there. Additionally, you can calculate the exact amount in interest that you’ll pay over the full loan term. Get preapproved for a mortgage to see rates based on your unique financial factors to see whether the monthly mortgage payments will be affordable for you. 

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