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- A fixed-rate mortgage locks in your rate for the duration of your loan.
- Many lenders offer multiple fixed-rate terms, including 30-year, 20-year, and 15-year fixed-rate mortgages.
- A fixed rate can be a good option if you want a predictable monthly payment.
You have a lot of options when you get a mortgage. What loan program will you use? How long of a term will you choose? Which mortgage lender will you work with?
You'll also need to decide on the type of rate you want, too — either fixed or adjustable (also known as variable).
Fixed-rate mortgages are the most common option, but they aren't right for everyone. Here's what to know about these popular mortgage loans.
Understanding a fixed-rate mortgage
When you buy a home, you'll choose between two basic types of mortgages: an adjustable-rate mortgage and a fixed-rate mortgage.
An adjustable-rate mortgage (ARM) locks in your rate for the first few years or so, then periodically changes over time — typically once or twice per year. With a fixed-rate mortgage, your interest rate is set.
Definition of a fixed-rate mortgage
A fixed-rate mortgage locks in your rate for the duration of your loan, which could be as long as 30 years. Although market mortgage rates will increase or decrease over the years, you'll still pay the same interest rate in 30 years as you did on your very first mortgage payment. As the name suggests, your rate and payment are "fixed."
How fixed-rate mortgages work
Mortgage rates are always fluctuating based on current market trends and investor demand. When you get a mortgage, your lender will offer you a rate that's based on both these larger economic trends as well as your own financial profile. Prior to closing, you'll lock in your rate.
If you have a fixed-rate mortgage, that rate won't change for the entire time you're paying off your mortgage. This means your monthly payment will remain relatively stable — though changes in the other factors that make up your mortgage payment, such as taxes or insurance, can cause the amount you owe each month to increase over the years.
Key features of fixed-rate mortgages
Fixed-rate mortgages can come in many forms: conventional loans, FHA loans, or VA loans, to name a few. You can also typically choose between a 15- or 30-year term, though some lenders will alternatives, like a 20-year loan.
The longer your term is, the lower your monthly mortgage payments will be, because you spread the loan balance out over a long period of time.
Shorter terms do have some benefits, though. Mortgage lenders charge lower interest rates for shorter terms, and you'll be making monthly payments for a shorter amount of time — these factors combined mean you could end up paying tens of thousands of dollars less over the life of your loan if you choose a 15-year or 20-year mortgage over a 30-year loan.
Whichever you choose, you'll enjoy a consistent rate for your entire loan term. That's the cornerstone of the fixed-rate mortgage.
Benefits of a fixed-rate mortgage
Fixed-rate mortgages are the most popular type of loan in the country, and for good reason. Borrowers enjoy:
Predictable monthly payments
Predictable payments can make it easier to plan and budget.
Granted, certain payments that are wrapped up in your mortgage could change over the life of your loan, such as private mortgage insurance or property taxes. But your interest rate will stay the same from year to year, which could make it easier for you to plan out your monthly expenses overall.
Stability over time
Having a stable rate and payment can make it easier to manage other parts of your financial life. You know how much to budget for each month, what income you need, and what extra income you have free to put toward other goals. It can help you manage your money more effectively.
Protection against rising interest rates
U.S. mortgage interest rates fluctuate along with the state of the economy, but with a fixed-rate mortgage, you don't have to sweat it if rates increase at any point during the life of your loan. You'll always keep your lower rate.
Drawbacks of a fixed-rate mortgage
Fixed-rate mortgages aren't perfect, and they aren't the right choice for everyone. Some drawbacks to these loans include:
Higher initial rates
Adjustable rates often start lower than fixed ones. They do fluctuate over time though, so your rate could end up higher down the road. For this reason, an ARM may be better if you plan to move before the intro-rate period ends.
Less flexibility
Fixed-rate mortgages are set in stone, so there's no flexibility. You won't suddenly enjoy a lower rate and payment in a few years, and have more cash flow to work with. That's only possible with an adjustable-rate loan.
Potential for higher long-term costs
If rates start trending downward, you won't benefit from lower rates unless you refinance. This could mean paying more in interest over the long haul.
Comparing fixed-rate mortgages with other loan types
Fixed-rate mortgages aren't the only option out there. To make sure you're choosing the right type of loan, see how fixed-rate mortgages compare to other mortgages below.
Fixed-rate vs. adjustable-rate mortgages
Fixed-rate mortgages have an interest rate that's permanent for the entire loan term, while ARMs have rates and payments that fluctuate, resetting every six months or year after a certain point in the loan term.
Often, ARMs will have lower interest rates than fixed-rate loans at the outset, but those rates can increase over time. Fixed-rate mortgages have rates and payments that stay the same as long as you have the loan, offering more stability and predictability.
Fixed-rate vs. interest-only mortgages
Interest-only mortgages let you pay only the interest portion of your loan for a certain period of time. Once that period is up, you begin making full payments or, in some cases, owe the remaining balance all at once (the latter option is called a "balloon" payment or mortgage). These may be a good option if you need low payments up front, but can afford higher ones later on.
Fixed-rate mortgages are amortized, meaning your balance and interest are spread evenly across your loan term. These payments will usually be higher than what you'd pay on an interest-only loan at first, but not once that interest-only period expires. They can typically be easier to manage and budget for, as they're predictable (while interest-only payments are not).
How to choose the right fixed-rate mortgage
With a fixed-rate mortgage, you have lots of options to choose from. Here's what you'll need to do to choose the right one:
Evaluate your financial situation
Know what your goals are for the loan. Do you want the lowest possible payment or rate? Do you need payment stability? Do you need something with a low (or no) down payment option?
These will all factor into what loan you should choose and what features you'll want on that loan.
Consider the loan term
A longer loan term will mean lower payments, but a shorter one will mean paying less in interest and will get you out of debt sooner. Decide which aligns with your goals and budget best, and if you're not sure, ask a mortgage professional to run the numbers on both options. This can help you see what fits best for your household.
Compare lenders and rates
Mortgage lenders vary widely on loan programs, rates, fees, eligibility requirements, and more, so you'll want to compare several options before deciding where to get your loan. If you want help with this step, consult a mortgage broker. These are like personal shoppers for mortgages, and they can help you compare a wide range of lenders and loan options all at once.
FAQs on fixed-rate mortgages
A fixed-rate mortgage is a home loan with a constant interest rate and monthly payments that remain the same throughout the term.
The interest rate is set when you take out the loan and does not change, ensuring predictable payments.
The benefits of a fixed-rate mortgage include stable payments, protection against interest rate increases, and more predictability for long-term financial planning.
The drawbacks of a fixed-rate mortgage include potentially higher initial rates upfront and less flexibility compared to adjustable-rate mortgages.
