What is a fixed-rate mortgage?
Updated March 10, 2022
A fixed-rate mortgage is a home loan with an interest rate that remains the same for the entire length of the mortgage. Fixed-rate mortgages can span anywhere from 10 to 50 years, but 30- and 15-year fixed-rates are the most commonly used options.
Fixed-rate loans are typically amortized, meaning that based on the interest rate and payment schedule set at the start of the loan, over time, a buyer will eventually end up paying less toward their interest bills each month and more toward the actual principal of the loan.
While a 30-year fixed-rate mortgage is widely treated as the default standard option when financing a home purchase, these loans come with their own pros and cons and their appeal will vary depending on a home buyer’s finances and long-term plans.
Fixed-rate mortgages can span anywhere from 10 to 50 years, but 30- and 15-year fixed-rates are the most commonly used options. Photo: Pixabay
What are the benefits of fixed-rate mortgages?
Their predictability is a large part of what makes 30-year fixed-rate mortgages so popular; since the interest rate is locked in at the start of the loan, homeowners can know with certainty what their monthly mortgage payments will look like for the entire term of the loan, and can plan accordingly. And because the term of the loan typically spans multiple decades, monthly payments are low. (The option to refinance is also always there.)
This makes fixed-rate loans one of the better options for buyers who plan to stay in their homes for the long term, and who have steady income that looks the same month to month.
Fixed-rate mortgages can also be particularly appealing at times when interest rates are low, allowing buyers to continue making payments based on their initial low rate, even if interest rates have gone up in the broader market.
What are the drawbacks of fixed-rate mortgages?
The safe, steady nature of fixed-rate mortgages comes with some potential downsides, chief among them the long-term cost. Though monthly payments for a 30-year fixed-rate loan may be lower than for other financing options, a homeowner can end up paying huge amounts of interest over the term of such a long loan, sometimes in an amount that ends up being larger than the principal of the loan itself. A buyer who takes out a fixed-rate loan at a time when interest rates are trending downward may also eventually find themselves stuck with interest payments that are above the going market rate.
Interest rates for fixed-rate loans also tend to be higher than those offered on other financial products such as adjustable-rate mortgages, which generally start with a lower interest rate for a set period of time (such as five or 10 years), with the understanding that rates may be adjusted and significantly increased after the initial low-interest period. (For this reason, adjustable-rate mortgages can be a more appealing option for buyers who plan to sell or refinance before the end of their initial low interest-rate period.)
Shorter-term fixed-rate loans can come with lower rates as well, but the trade-off for a shorter payoff period is significantly higher monthly payments—for instance, a 15-year fixed-rate may have a lower interest rate than its 30-year counterpart, but due to the shortened time period, monthly payments would be twice as much.
Fixed-rate mortgages also offer less potential financial flexibility. While adjustable-rate mortgages allow buyers to make large lump payments to the principal and thus reduce their monthly bills, with a fixed-rate, any additional amount contributed beyond the required monthly payment will be used to shorten the total time of the loan, rather than shrink monthly payments.