What Is a Fixed-Rate Mortgage and How Does It Work?

A fixed-rate mortgage is a mortgage loan that carries the same interest rate over the loan's entire life. Unlike an adjustable-rate mortgage, your interest rate won’t change as the economy fluctuates. This loan is often a popular choice among homebuyers because it provides more consistency and is easier to budget for.

What is a fixed-rate mortgage and how does it work?

A fixed-rate mortgage is any mortgage that has the same interest rate from the time that the loan is originated to the time that it is paid off. With this type of home loan, you can lock in a fixed mortgage rate today and rely on paying the same one over the entire life of the loan, no matter how the state of the economy changes.

Fixed-rate mortgage term options

Fixed mortgage rates come with different term options; the most common can fit into the following three categories:

• 15-year: With a 15-year loan term, your mortgage payments will be spread out over 15 years. With this, you can expect your monthly payment to be higher, but you’ll pay less in interest than longer-term loans and will ultimately pay off your loan more quickly.
• 30-year: An average fixed-rate mortgage comes with a 30-year mortgage term and is chosen by most homebuyers. With this term, your mortgage payments will be broken up over 30 years, making payments more affordable than with shorter terms. However, you’ll pay more in interest since it has more time to accrue.
• Other: 15-year and 30-year mortgage terms are the most common fixed-rate term options, but they aren’t the only ones. For instance, some lenders offer shorter or longer terms to eligible borrowers.

Types of fixed-rate mortgages

When it comes to getting a fixed-rate mortgage, you have many options to choose from since many different loan programs offer fixed interest rates. These include:

• Conventional mortgage: A conventional mortgage is simply any mortgage that isn’t insured or guaranteed by the government.
• FHA loan: FHA loans are designed for first-time homebuyers. These loans typically come with low down payment and credit score requirements.
• VA loan: VA loans are mortgage loans that are offered to eligible veterans of the military and their family members. With this loan, homebuyers can buy a home with no down payment or private mortgage insurance required.
• USDA loan: A USDA loan can help you buy a home in eligible rural areas. To qualify, you’ll need to meet income eligibility requirements and agree to make the home your primary residence.
• Conforming loan: A conforming loan is a type of mortgage that meets the standards required by Fannie Mae, Freddie Mac, and the Federal Housing Finance Agency (FHFA).

Fixed-rate mortgage vs. adjustable-rate mortgages

If you don’t need a fixed rate, there are adjustable-rate mortgages, sometimes referred to as ARMs. Although both types of loans can help you accomplish the same end goal — purchasing a house — they are quite dissimilar:

Pros and cons of fixed-rate mortgages

Fixed-rate mortgages come with upsides and downsides. Here are the pros and cons that you can expect from a fixed-rate mortgage:

Pros

• Consistent principal and interest payments: Since your interest rate stays the same, fixed-rate mortgages provide more consistent payments.
• Peace of mind: Knowing that your interest rate won’t change over time can help you navigate times of economic difficulty with more certainty.
• Simple for first-time homebuyers: The homebuying process can be complicated enough, and a fixed-rate mortgage can help you simplify the process by ensuring your rate is locked in.

Cons

• Higher initial interest than ARMs: Although fixed-rate mortgages provide consistency, they do come with higher rates when compared to the initial rates offered by ARMs.
• You’ll need to refinance for a lower rate: Even if market rates drop significantly, you won’t be able to take advantage of lower rates with a fixed rate unless you're willing to refinance.
• Possible higher overall cost: Depending on how market interest rates change over your loan term and the fixed rate that you lock in, you could end up paying more with a fixed-rate loan than with an ARM.