Home Buying
December 9, 2021

Loan types: Fixed-Rate Mortgage

What is a fixed-rate mortgage?

A fixed-rate mortgage is a home loan with an interest rate that does not change over the life of the loan. Many borrowers prefer fixed-rate mortgages because they can count on their monthly mortgage payments staying the same over time.

What is the difference between a fixed-rate mortgage and an adjustable-rate mortgage?

When you borrow money to purchase or refinance a home, you can choose between a fixed or adjustable interest rate. While the mortgage interest rate can vary with an adjustable-rate mortgage, with a fixed-rate mortgage, it will remain the same over the life of the loan. And because your interest rate won’t fluctuate if you have a fixed-rate mortgage, your monthly payments won’t change.

Borrowers who have fixed-rate mortgages appreciate the predictability of knowing what their monthly mortgage payments will be over the duration of the loan. However, if interest rates drop, they may feel they’ve missed out on a better deal, and that’s one of the features that appeals to some about ARM rates.

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that can vary over the life of the loan. Adjustable-rate mortgages initially offer a low rate for a specified period of time and then switch to a floating rate that fluctuates along with a designated rate index. Therefore, if you have an adjustable-rate mortgage, your monthly home loan payments will remain the same for a while and then can go up or down over time.

How does a fixed-rate mortgage work?

Fixed-rate mortgages are typically much simpler than adjustable-rate mortgages. As with all home loans, fixed-rate mortgages carry different rules, fees, structures, caps, and penalties, so you must do your due diligence to ensure you understand the agreement.

With a fixed-rate mortgage, the interest rate doesn’t change for the entire loan term. The borrower and lender agree to a mortgage interest rate, which is based on factors including current market rates, borrower finances and credit history, the home price, loan amount, down payment, and loan term and type. Although the total monthly housing payment could change due to changes in taxes or insurance, the monthly mortgage payment that goes toward principal and interest will remain the same.

What is amortization?

When you first begin making monthly mortgage payments on your home loan, more of your payment will go toward interest, or what it costs to borrow the money, and less will go toward the principal, or the amount you have borrowed. Over time, as the outstanding balance on your principal drops, you’ll owe less interest on that balance, and more money can be applied toward your principal balance until it is paid off. At that time, you will own your home outright. This process is called amortization, and it follows what is called an amortization schedule.

What are some types of fixed-rate mortgages?

Lenders offer various types of fixed-rate mortgages, including 10-year, 15-year, and 30-year loans represented by the term, or length, of the loan.

Shorter-term loans, like 15-year loans, appeal to borrowers who want to pay off their loan and own their home outright more quickly. These borrowers have a lower interest rate and pay less interest over the life of the loan, however, their monthly payments are higher.

Longer-term loans, like 30-year loans, appeal to borrowers who don’t mind taking longer to pay off their home. They have a higher interest rate and pay more to borrow the money over the life of the loan, but their monthly payments are lower.

What are some types of fixed-rate mortgages?

Current market conditions:  Currently, most new home loans are fixed-rate mortgages. This is because interest rates have been at historic lows, and buyers want to take advantage of those low rates over the long term. It’s a good time to get a fixed-rate home loan.

Financial situation: Consider whether you prefer the predictability of a fixed rate over an adjustable rate. Most borrowers like to know what their payments will be and how long it will be before they have paid off their home.

Future plans: If you plan to stay in your home for a long time or the rest of your life, a shorter-term fixed-rate loan could be a wise choice for you. That way, you’ll have the security of knowing your home has been paid for and after the loan ends, you can use that money for other purposes. If instead, you plan to move sooner or if you simply want to have lower monthly payments, you might opt for a longer-term fixed-rate loan which will be lighter on the pocketbook. 

Whether you choose a fixed-rate or adjustable-rate home loan with a shorter or longer term is a personal decision with many variables. Doing your research can help ensure you find the loan that’s right for you, so compare lenders, loans, and rates to find your ideal mortgage.

Get a mortgage without the mess.

When you’re shopping around for mortgages, it’s wise to partner with a lender who is dedicated to a transparent and simplified home buying process. At Neat Loans, we’ve cleaned up the home financing process so you can get a mortgage without the mess. Get pre-approved in 3 minutes with Neat.

Phillip McSween

Manager, Mortgage Origination - NMLS #2104845
Phillip McSween manages Neat's team of home loan advisors. As a champion of a client's needs and financial goals, he values speed, transparency, and certainty throughout the entire home financing process.