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Fixed-Rate Mortgages: What You Need to Know

A fixed-rate mortgage has an interest rate that never changes, so payments are predictable.
June 2, 2020
Finding the Right Mortgage, Mortgages, Personal Finance
fixed-rate mortgage
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Fixed-rate mortgage definition

A fixed-rate mortgage is a home loan with an interest rate that stays the same. Most mortgages are fixed-rate loans.

The main benefit of fixed-rate mortgages is that they have relatively predictable payments. Each month’s principal and interest payment is the same amount, for as long as you have the loan.

» MORE: 8 types of mortgage loans for home buyers and refinancers

How fixed-rate mortgages work

A fixed-rate mortgage is fully amortizing, meaning that the principal and interest that you owe your lender are fully paid off when the loan ends. Part of each monthly payment repays some interest. The rest pays down the amount you owe.

In a fixed-rate mortgage’s early years, most of the payment goes to interest; eventually, most goes to principal. This simplicity contrasts with the complexity of an adjustable-rate mortgage, or ARM, which features a changeable interest rate and many variations on loan terms and payments.

» MORE: Compare adjustable-rate and fixed-rate mortgages

Common fixed-rate mortgage terms

A loan’s term is the length of time you have to repay the principal and interest by making equal monthly payments. As you shop for a fixed-rate mortgage, you might see these terms:

30-year: This is likely the longest mortgage term you will encounter. It’s the most common term for a fixed-rate purchase mortgage. For a given loan amount, a 30-year term gives the lowest monthly payments. Compare 30-year fixed mortgage rates.

15-year: Most mortgage lenders offer a 15-year term. Compared to a 30-year mortgage of the same amount, a 15-year loan has higher monthly payments, but lower interest charges over the life of the loan. A 15-year loan usually has a lower interest rate. Compare 15-year fixed mortgage rates.

Depending on the lender, you might also encounter fixed-rate mortgages with these terms:

20-year: Some lenders offer 20-year fixed mortgages. For a given loan amount, the monthly payments are more affordable than on a 15-year mortgage and less affordable than on a 30-year mortgage. Compare 20-year fixed mortgage rates.

10-year: A 10-year fixed-rate mortgage is for the borrower who wants to pay off the loan fast and can afford higher monthly payments. Compare 10-year fixed mortgage rates.

» MORE: How mortgage rates are determined

Pros of fixed-rate mortgages

Every type of home loan has its pluses and minuses. Fixed-rate mortgages have these sought-after qualities:

Predictable. The principal-and-interest portion of a fixed-rate mortgage’s monthly payment doesn’t change, although taxes and insurance premiums can go up and down over time.

Simple. Fixed-rate mortgages are easier to understand, making shopping easier.

Protected. If mortgage rates rise after you get your home loan, you have the safeguard of an unchanging rate on your fixed-rate mortgage.

Cons of fixed-rate mortgages

Fixed-rate mortgages have these drawbacks:

Fear of missing out. If interest rates fall after you get your home loan, the only way to take advantage of lower mortgage rates is to refinance.

Potentially more costly. An ARM could be cheaper if you expect to sell the home or refinance to a fixed-rate loan before the low-rate introductory period ends.

Higher rates. Rates are higher than in the introductory phase of an adjustable loan, but ARM costs can increase later.

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