Fixed rate mortgages
Fixed rate mortgages are the most common types of home loans you’ll come across, delivering an appealing mix of affordability, simplicity and convenience. Understanding how they work is essential if you want to accurately compare your mortgage options and find the best fit before applying for a home loan.
Fixed rate mortgages FAQ
- What is a fixed rate mortgage?
- How does a fixed rate loan work?
- Fixed rate vs. adjustable rate mortgages
- What are the benefits of fixed rate mortgages?
- What are the drawbacks to fixed rate mortgages?
- Who should consider a fixed rate mortgage?
- What are your fixed rate loan term options?
- How can you find the right fixed rate mortgage for you?
What is a fixed rate mortgage?
Mortgage lending can be very complicated, making it difficult for homebuyers to appreciate the nuances of different loan types. With fixed rate loans, however, lenders have a straightforward loan product that’s easy for any borrower to understand.
A fixed rate mortgage is a home loan with an interest rate that never changes. Regardless if you have a 15-, 30- or even 40-year fixed rate loan, your interest rate will always stay the same from year to year until your loan is repaid.
The same holds true for your monthly fixed rate mortgage payment: You’ll pay the exact same amount over the entire life of the loan. That consistency stands in stark contrast to adjustable rate mortgages, which reassess interest rates on a regular basis after an initial fixed rate term.
Conventional fixed rate mortgages are, by far, the most popular financing vehicles that consumers use to buy property. While fixed rate loans can offer various loan terms, these are the most common options available to homebuyers:
- 30-year fixed rate mortgages
- 15-year fixed rate mortgages
30-year fixed rate mortgages
The 30-year mortgage is the go-to home loan for many mortgage providers — and for good reason. A conventional 30-year fixed rate mortgage combines affordability with predictability. Over the course of your 30-year home loan, you can rest easy knowing your monthly mortgage payments will never change. Extending a mortgage over such a long period of time helps keep your housing costs down, which is why 30-year fixed rate mortgages are so popular with homeowners.
Average 15-Year Fixed Mortgage Rate
UNITED STATES AVERAGE0% -
15-year fixed rate mortgages
Want to pay off your home loan quicker so you can own your house free and clear in less time than a 30-year mortgage? Your amortization schedule will be cut in half with a 15-year fixed rate mortgage. Your monthly payments will be higher compared with a 30-year mortgage due to the significantly shorter loan term. On the plus side, though, lenders often offer lower interest rates on 15-year mortgages, so you’ll pay less over the long run.
How does a fixed rate loan work?
When you apply for a fixed rate mortgage, your lender will set an interest rate based on a wide variety of criteria — some of which is outside of your control. Treasury bond movement, mortgage lending industry trends and your personal finances (credit score, outstanding debt, income level, etc.) all factor into your interest rate. Once you’ve agreed to your loan terms, you won’t be able to change your interest rate unless you refinance your mortgage later.
As noted above, one of the biggest benefits of a fixed rate mortgage is that your total monthly principal — i.e., the loan amount — and interest payments always stay the same. The only time you might see a fluctuation in your monthly housing costs would be to account for shifts in property taxes, homeowners insurance premiums or private mortgage insurance. Many people prefer a fixed rate mortgage loan because there are no unwelcome surprises. It’s truly the model of consistency.
That doesn’t mean your mortgage payments will be divided between your principal and interest the same way every month, though. As your fixed interest rate mortgage amortizes, the amount of principal and interest you pay will change from month to month. A larger share of your mortgage payment may go to interest during the early days of your home loan, but over time, more of that money will be earmarked for the principal.
Take a look at this hypothetical amortization schedule for a $165,000 home loan to see how your fixed rate mortgage payments evolve over time:
Payment Date
Payment
Principal
Interest
Total Interest
Balance
Jul 2021
$452
$698
$412
$456
$14
Jul 2022
$652
$658
$432
$476
$16
Jul 2021
$452
$698
$412
$456
$14
As you can see, the total payment amount is the same each month, right down to the penny. But how that money is divided between the principal and interest steadily changes.
That’s because you pay mortgage interest in arrears. In other words, the interest you owe in October is based on your loan balance in September, November is based on October’s loan balance, and so on. As your loan balance shrinks, the amount of interest you owe each month goes down as well until your mortgage is fully amortized.
Fixed rate vs. adjustable rate mortgages
Fixed rate mortgages stand tall in the lending industry, but adjustable rate mortgages (ARM) are no slouches either. An ARM loan handles interest very differently than a fixed rate loan, which homebuyers may find very appealing in some scenarios.
Borrowers with ARM home loans will have the same interest rate for a set period of time — usually anywhere from 5 to 10 years. Once that fixed rate period ends, the lender will reassess the mortgage rate on a recurring basis. You’ll see ARM loans described as 7/6, 5/6, 7/6 and so on. The first number tells you how long that initial period is, while the second number tells you how often the interest rate will be reevaluated afterward.
In the case of a 7/6 ARM, your mortgage would have a fixed interest rate for the first 7 years of the loan. After that, your lender would reassess the interest rate every six months until the loan is repaid.
There are some advantages to an ARM, namely an often lower initial interest rate compared with fixed rate loans. Also, if mortgage rates go down in the future, you may be able to take advantage of lower interest rates once the fixed rate period ends.
Of course, the opposite could be true as well: Your interest rate could increase down the road, exceeding current fixed mortgage rates. In that scenario, you might wind up paying more interest with an ARM than if you had gone the more conversative route with a fixed rate loan.
Fixed vs. adjustable rate mortgage: Which is right for you?
Homebuyers have tons of home loan options to explore, and even choosing between broad loan categories like ARM vs. fixed rate mortgages can be tricky. Both financing options have their pros and cons to consider, and the right mortgage will often depend on your financial situation, what you prioritize most in a mortgage and what your risk appetite looks like.
The truth is, there’s a fair amount of uncertainty that comes with an ARM home loan, especially compared with a fixed rate mortgage. You can’t say for sure what your interest rate will be 10 years from now, which means you won’t really know what your mortgage payments will look like down the road. Will you be financially prepared to shoulder higher housing costs a decade from now? It’s a worthwhile question to ask yourself when weighing your options.
Because ARM interest rates are typically lower than comparable fixed rate loans — at least during the initial fixed term — it should come as no surprise that ARM loans are very popular for short-term homeowners. That may include people buying a starter home or newlyweds who plan to start a family sometime in the future but aren’t quite ready yet.
You could come out pretty far ahead if everything breaks right with an ARM. You may land yourself in a situation where you enjoy a comparatively lower interest rate during your fixed rate period and then see mortgage rates drop when it’s time to reset your rate. Calling ARMs a gamble would be a bit of a stretch, but there’s certainly a risk/reward component that you need to consider.
With a fixed rate loan, the only way to take advantage of lower mortgage rates would be to refinance. And a fixed rate mortgage refinance would involve paying additional fees and closing costs. Meanwhile, ARM users are not required to pay any lending fees or closing costs when interest rates are reassessed.
Take an honest assessment of your future plans when deciding between a fixed or adjustable rate mortgage:
- Homebuyers have tons of home loan options to explore, and even choosing between broad loan categories like ARM vs. fixed rate mortgages can be tricky. Both financing options have their pros and cons to consider, and the right mortgage will often depend on your financial situation, what you prioritize most in a mortgage and what your risk appetite looks like.
- The truth is, there’s a fair amount of uncertainty that comes with an ARM home loan, especially compared with a fixed rate mortgage. You can’t say for sure what your interest rate will be 10 years from now, which means you won’t really know what your mortgage payments will look like down the road. Will you be financially prepared to shoulder higher housing costs a decade from now? It’s a worthwhile question to ask yourself when weighing your options.
- Because ARM interest rates are typically lower than comparable fixed rate loans — at least during the initial fixed term — it should come as no surprise that ARM loans are very popular for short-term homeowners. That may include people buying a starter home or newlyweds who plan to start a family sometime in the future but aren’t quite ready yet.
- You could come out pretty far ahead if everything breaks right with an ARM. You may land yourself in a situation where you enjoy a comparatively lower interest rate during your fixed rate period and then see mortgage rates drop when it’s time to reset your rate. Calling ARMs a gamble would be a bit of a stretch, but there’s certainly a risk/reward component that you need to consider.
- With a fixed rate loan, the only way to take advantage of lower mortgage rates would be to refinance. And a fixed rate mortgage refinance would involve paying additional fees and closing costs. Meanwhile, ARM users are not required to pay any lending fees or closing costs when interest rates are reassessed.
- Take an honest assessment of your future plans when deciding between a fixed or adjustable rate mortgage:
Depending on how you answer these questions, either a fixed or adjustable rate mortgage could make the most sense.
What are the drawbacks to fixed rate mortgages?
Fixed rate mortgages are great options for financing a home purchase, but they’re not perfect — no loan option is, really. We would be remiss if we didn’t address the potential disadvantages that a fixed rate mortgage presents:
- Inflexibility The drawback to a fixed rate mortgage’s steadfast consistency is that you may miss out on opportunities to take advantage of any future drop in mortgage rates. That is, unless you refinance your home loan.
- Initial costs ARMs typically offer lower interest rates than fixed rate home loans during their initial fixed rate term. Now, that mortgage rate could go up or down afterward, but at least at the outset, you stand to pay more in interest on a fixed rate loan.
Who should consider a fixed rate mortgage?
Given the various fixed rate mortgage pros and cons to consider, what kind of borrower would be best served with this type of home loan?
- Homebuyers who plan to stay in their new house for a long time
- Borrowers who don’t want to run the risk of interest rates increasing
- People buying a home when interest rates are at historic lows
- Borrowers with a steady income stream that’s likely to keep flowing for the foreseeable future
Remember: Even if interest rates drop significantly at some point in the future, dipping well below fixed mortgage rates today, you’re not completely out of options. You could always refinance your mortgage to take advantage of more favorable loan terms, including a lower interest rate.
What are your fixed rate loan options?
Most prospective homebuyers are familiar with the conventional 30-year mortgage, but look a little deeper and you'll find plenty of fixed rate home loan options to explore. Not all lenders will offer these loan terms, though, so it’s a good idea to shop around to find the best fixed rate mortgage for you.
- 30-year fixed rate mortgages The de facto standard home loan, 30-year mortgages offer affordable monthly payments due to the long loan terms.
- 15-year fixed rate mortgages Cutting the length of your loan in half means you’ll pay off your mortgage quicker, gain equity in your home faster and pay less interest overall. But as a tradeoff, you’ll owe more each month until you repay your loan.
- 40-year fixed rate mortgages Far less common than 30- or 15-year options, 40-year loans promise some of the lowest monthly payments possible — assuming you can find one. Be aware that this type of mortgage is the slowest option when it comes to building home equity.
- FHA fixed rate loans The Federal Housing Administration insures fixed rate mortgages delivered through approved lenders, making it easier for more people to qualify for a home loan. Some of the biggest perks of an FHA loan include flexible down payment options and more lenient borrower qualifications.
- VA fixed rate loans Active or former service members may qualify for fixed rate home loans supported by the Department of Veterans Affairs, better known as VA loans. If eligible, you may receive flexible down payment and financing terms that exceed even the FHA’s loan offerings.
- USDA fixed rate loans Homebuyers living in rural communities may be able to secure a mortgage through the U.S. Department of Agriculture. Similar to VA mortgages, USDA loans offer very competitive financing terms, especially when it comes to your down payment options and qualification requirements.
- Jumbo home loans Need a home loan that exceeds conforming limits? A jumbo fixed rate mortgage may be right for you. Due to the higher loan amount, your lender will likely require more stringent eligibility requirements, including higher credit scores, lower debt-to-income ratios and less flexible down payment options.
How can you find the right fixed rate mortgage for you?
With so many options to choose from, you should carefully compare each loan type to see how they stack up. A fixed rate mortgage calculator can be very helpful in this regard, letting you plug in your expected loan amount, interest rate, down payment, property taxes and other criteria so you can accurately project your monthly payments.
Don’t hesitate to shop around for the lowest fixed rate mortgage. Reach out to lenders to see what loan products and services they offer, compare their rates and seek out the best mortgage terms for your financial situation. It’s a big decision, and your due diligence will be rewarded.
Speaking with a qualified mortgage expert is important as well, as they can point you toward the best fixed rate mortgage for your situation. Every homebuyer faces unique circumstances and challenges when financing a home purchase, and you want to be sure that your loan officer understands what you need from your mortgage agreement. That could be a low interest rate, flexible loan terms, a shorter term length or fewer upfront costs. The right mortgage expert will work with you to create the best home loan possible.
When you’re ready to take the next step in your homebuying journey, don’t forget to start your digital mortgage. Applying for pre-qualification is quick, easy and convenient. You’ll be well on your way to realizing your dreams of homeownership in no time at all.
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Sample monthly Principal and Interest (P&I) payment of $XXXX is based on a purchase price of $300,000, down payment of 20%, XX year fixed rate mortgage and rate of 0.000%/0.000% APR (annual percentage rate). Advertised rates and APR effective as of xx/xx/xx and are subject to change. Above scenario assumes a first lien position, xxx FICO score, xx day rate lock on a primary residence and are subject to change without notice. Subject to underwriting guidelines and applicant’s credit profile. Sample payment does not include taxes, insurance or assessments. Not all applicants will be approved. The actual interest rate, APR and payment may vary based on the specific terms of the loan selected, verification of information, your credit history, the location and type of property, and other factors as determined by Lender. Contact Guaranteed Rate for more information and up to date rates.
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