What is a fixed rate?
A fixed rate is an interest rate that stays the same for the life of a loan, or for a portion of the loan term, depending on the loan agreement.
The fixed-rate mortgage is popular because it gives the borrower a predictable monthly payment, usually for the life of the loan. A fixed-rate mortgage is the opposite of a variable-rate mortgage, such as a 5/1 ARM. One downside to a fixed-rate mortgage is that it does not take into account fluctuations in the market. If interest rates drop, the fixed-rate mortgage borrower continues to pay the same amount of interest. On the other hand, the variable-rate borrower may experience an unaffordable adjustment to his mortgage payment when rates adjust. That’s the kind of uncertainty fixed-rate borrowers prefer to avoid.
The borrower’s credit history is used by a lender to set the fixed rate. A homebuyer with an excellent credit score will get the best rate. Other factors the lender will consider in setting a fixed interest rate are the length of the loan, the borrower’s loan-to-value ratio (LTV) and the borrower’s income. Shorter loans usually have lower interest rates because the lender considers them less risky than products with longer terms.
Example of fixed rate
Taylor is ready to become a homeowner. He decides that he wants a 30-year fixed-rate mortgage because he plans to stay in the home for many years and he wants a consistent monthly payment — not one that could fluctuate with the market. Taylor borrows $200,000 at a fixed rate of 4 percent, resulting in a monthly payment of $955 per month. The day after he closes on his loan, mortgage rates shoot up. But Taylor isn’t worried, because his mortgage rate is fixed for the life of the loan.
Ready to become a homeowner? Compare mortgage rates to make sure you’re getting the best loan for your needs.