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Fixed-rate mortgages: What they are and how they work

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Not all mortgages are created equal. While some borrowers choose adjustable-rate mortgages (ARMs), the most frequent loan type by far is the fixed-rate mortgage. Yet even with fixed-rate loans, there are a range of options. Read on to learn all you need to know about fixed-rate mortgages and which kind might be best for you.

What is a fixed-rate mortgage?

A fixed-rate mortgage has an interest rate that remains the same for the life of the loan. Fixed-rate loans are the most popular type of financing because they offer predictability and stability — you’ll never be surprised by the principal and interest charges in your monthly mortgage payment, because they’ll stay the same for the entire loan term. (Your total monthly payment, which includes homeowners insurance and property taxes, might have small fluctuations due to changes in those costs.) The most common type of fixed-rate mortgage is a 30-year loan, but you’ll frequently see offerings for 20-year, 15-year and 10-year loans, too.

How fixed-rate mortgages work

The rates mortgage lenders advertise are always moving up and down due to wide range of factors. So, you might see an offer for a 5 percent interest rate today and a 5.2 percent interest rate tomorrow. With a fixed-rate mortgage, that movement doesn’t impact you. No matter what happens after you secure your loan, the rate at which you locked in your loan remains the same.

Your payment amount also stays the same, but the breakdown of where those funds go — how much is paying down the principal versus how much is paying interest charges — varies based on the amortization schedule.

Let’s say you make a 20 percent down payment on a $375,300 home, and you borrow $300,240 with a 30-year fixed-rate mortgage at 4.83 percent interest. You’d have a $1,646 payment each month, excluding insurance and taxes, for the next 30 years.

In the first month of your term, only about $371 of your payment would go toward the actual principal, with the remainder going toward interest. Twenty years later, more than $970 of your payment would be going toward the principal. As the balance of those payments tilts more toward your principal, you’re accelerating the equity you have in the property.

How long do I repay a fixed-rate mortgage?

You’ll pay back your fixed-rate mortgage over a predetermined term. The most common offering is a 30-year fixed-rate mortgage, which allows you to pay off your home loan over three decades. That might sound like a long time, but the extended timeline allows you to reduce the size of your monthly payment and free up room in your budget.

Another widely available option is a 15-year fixed-rate mortgage. This typically comes with a lower interest rate, but you’ll need to pay back the loan in half the time. A 15-year fixed-rate mortgage is ideal for borrowers who have the cash flow and want to pay off their home faster at less interest.

Some mortgage lenders let you customize the term, too, between eight and 30 years.

While the term attached to a fixed-rate mortgage is the maximum amount of time you have to repay it, you can also opt to contribute additional money toward the principal to shorten your pay-back period. Just make sure your loan doesn’t have a prepayment penalty (most don’t), and that the extra payments are paying down the principal. You can contact your lender to confirm this.

How to calculate fixed-rate mortgage payments

Calculating your fixed-rate mortgage payment involves a bit of math. You can use Bankrate’s mortgage calculator to get a sense of how much you’ll pay each month.

As you come up with a ballpark for how much house you can afford, remember to consider the additional costs of owning a home, such as property taxes, homeowners insurance, HOA fees and maintenance and repairs.

Types of fixed-rate mortgages

The number of years attached to a fixed-rate mortgage isn’t the only point of distinction to consider. Here’s a rundown of some of the verbiage you’ll see next to fixed-rate loans:

  • Conventional – Conventional fixed-rate mortgages typically come with slightly stricter requirements to be approved, such as a minimum 620 credit score and a debt-to-income (DTI) ratio no higher than 43 percent, although there are some exceptions to these rules. These loans are issued by banks, credit unions, online lenders and other types of lending institutions.
  • FHA, VA, USDAFHA loans, VA loans and USDA loans have fixed rates and come with less strict requirements than conventional loans. FHA loans are the most widely available, while USDA loans are designated for certain borrowers in rural areas. VA loans are reserved for military service members, veterans and eligible family members.
  • Conforming – A conforming loan adheres (“conforms”) to requirements from the Federal Housing Finance Agency (FHFA), such as loan limit, that allow it to be sold on the secondary market. As long as a loan meets these standards, it can be bought and sold to help keep money flowing through the mortgage market.
  • Non-conforming – Non-conforming loans, including jumbo loans, don’t meet FHFA requirements. To qualify, you might pay a higher rate and need to check off some stricter requirements in terms of your credit score and cash reserves.
  • Amortizing – The vast majority of fixed-rate mortgages are amortizing loans, which means that your monthly payments go toward both the principal and the interest charges. From the first day you start paying an amortizing loan back, you’re building equity in the home.
  • Non-amortizing – Non-amortizing loans are much less common, but come with an appealing benefit: significantly lower monthly payments that might only cover the interest for a period of time. When that benefit expires, though, you could be in for a rude awakening with a balloon payment.

Example of a fixed-rate mortgage

Meet Jill, a first-time homebuyer who wants to stop renting. She’s crunched the numbers and knows she can afford around $1,200 per month for mortgage principal and interest costs.

Working backward from that monthly payment, we can get a sense of how much Jill might be able to borrow between two different fixed-rate mortgages. (Note: We did not assume a down payment or closing costs in this scenario.)

Amount Fixed rate Term Monthly payment
$240,000 5% 30 years $1,288
$152,000 4.5% 15 years $1,162

For virtually the same monthly payment, Jill can borrow $88,000 more with a 30-year fixed loan.

Now, let’s say Jill’s budget and solid credit allows her to opt for the $240,000 loan, regardless of loan term. If she chooses a 30-year fixed-rate mortgage, she’ll pay a higher interest rate but enjoy the ability to stretch out the payback period. That convenience of a longer term comes with a major drawback, though: a much bigger price tag for overall interest charges:

Amount Fixed rate Term Interest total
$240,000 5% 30 years $223,990
$240,000 4.5% 15 years $57,363

If Jill can afford the higher monthly payments of a 15-year mortgage, she’ll save more than $166,000 in interest.

Fixed-rate mortgages vs. adjustable-rate mortgages

As you compare fixed-rate mortgages, you might also come across adjustable-rate mortgages (ARMs). True to its name, the rate on an ARM adjusts as the market changes, but the loan comes with an introductory rate for a period of time.

For example, a 5/6 ARM has a five-year introductory rate. After that five-year time frame, your rate will change once every six months. How the rate moves (up or down) depends on the index to which it’s tied. The rate increases might be capped at 2 percent annually, say, and 5 percent for the life of the loan.

ARMs are more complex loans, and they’re generally more beneficial for a borrower who doesn’t plan to live in the home for a long time.

Pros and cons of a fixed-rate mortgage

The key advantage of a fixed-rate mortgage is predictability. Though your homeowners insurance and property tax payments might fluctuate, your mortgage payments will stay exactly the same. This is no small thing when it comes to budgeting your monthly spend and managing your financial health.

Another plus side to fixed-rate loans: Your interest rate will also stay exactly the same. Regardless of how rates rise or fall over time, you’ll maintain the rate you locked in when you acquired the loan.

This pro, however, can also be one of the downsides if you took on the mortgage when rates were high. You can always refinance the loan if interest rates go down significantly, but this might not be a viable option if you can’t afford refinance closing costs.

Fixed-rate loans can also be tougher to qualify for than ARMs, so get all your financial ducks in a row before applying. Understand the base credit score and DTI ratio that would make you the most qualified borrower.

Be aware, too, that the monthly payments for fixed-rate loans can be higher, initially, than those of ARM mortgages. This will probably only be a consideration for you if you know upfront you’ll be in the property short-term.

Compare mortgage rates

The average 30-year fixed mortgage APR is 5.410%, according to Bankrate’s latest national survey of lenders, while the average 15-year fixed mortgage APR is 4.760%. By comparison, the average 5/1 ARM APR is 4.780%.

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Written by
David McMillin
Contributing writer
David McMillin is a contributing writer for Bankrate and covers topics like credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Mortgage editor
Reviewed by
Senior wealth manager, LourdMurray