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 type of 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 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.

Fixed-rate mortgage FAQ

Are fixed-rate mortgages a good idea?

Whether a fixed-rate mortgage is a good idea depends on your financial and personal goals as well as current fixed rates. Homebuyers looking for predictable payments over the entirety of their loans will appreciate fixed-rate mortgages. Other homebuyers might prefer a loan that has a lower initial interest rate instead of long-term consistency, for example if they are planning to move soon.

Why did my mortgage go up if I have a fixed rate?

If you have a fixed-rate mortgage, your monthly interest rate and principal payment will stay the same. However, other factors that impact your monthly payment may increase, raising your total monthly payment. These factors include:

• Homeowners insurance premium
• Mortgage insurance premium
• Property tax bill

What is the most common term for a fixed-rate mortgage?

The most common term for a fixed-rate mortgage is 30 years. That said, other mortgage terms are offered to qualifying borrowers, such as 10 or 15 years.

Can I pay off a fixed-rate mortgage early without penalties?

While it is possible to pay off a fixed-rate mortgage early and without penalty, it depends on the terms you agreed to with your loan provider. Some lenders charge prepayment penalties on fixed-rate mortgages while others don’t.

How is interest calculated on a fixed-rate mortgage?

Calculating interest on a fixed-rate mortgage is simple since the rate doesn’t change over the life of the loan. To be clear, your interest rate reflects how much you will pay annually, while your annual percentage rate (APR) encompasses your interest rate plus other fees, points, etc.

To figure out how much interest is due on a fixed-rate mortgage each month, your loan issuer will multiply your remaining principal by your interest rate and divide this number by 12 (the number of months in a year). For example, if you have an interest rate of 4.75% and $200,000 remaining on your loan, the following formula would be used to figure out your interest payment: ($200,000 * 0.0475) / 12 = $791.66