A “fixed-rate mortgage” is the most ordinary and uncomplicated mortgage available to homeowners today. As the name suggests, the interest rate on a fixed mortgage does not change during the entire duration of the loan, which is typically 30 years.
For that reason, fixed-rate mortgages do not have associated mortgage indexes, margins, or caps, because they are not variable-rate loans.
Another key characteristic of the fixed-rate mortgage is that monthly mortgage payments remain constant throughout the life of the loan, to the very last month when the loan is finally paid off.
In other words, there aren’t too many surprises with a fixed-rate loan, allowing the homeowner to sleep at night.
Types of Fixed-Rate Mortgages
The most common type of fixed-rate mortgage is the 30-year fixed, which amortizes over thirty years, with the majority of early payments going toward interest, and the bulk of later payments going toward principal.
The next most popular term for a fixed mortgage is the 15-year fixed loan, which amortizes over fifteen years, bumping up monthly mortgage payments significantly, but reducing the amount of interest paid throughout the duration of the loan considerably.
Many banks and mortgage lenders also offer 10, 20, 40, and 50-year fixed loans as well, though they are far less popular and widespread.
You may also be able to choose your own term, via programs like Quicken’s Yourgage, and through similar programs offered by other lenders.
Fixed Mortgages with Interest-Only Options
Some fixed-rate mortgages also feature interest-only periods, which allow homeowners to make interest-only payments during the first five to ten years of the loan term, though the loan will recast once the interest-only period is up to account for any reduced payments made during that period.
In other words, payments after the interest-only period expires will be higher to compensate for lower payments made early on. However, the mortgage is still considered “fixed.” It is simply recast to reflect the remaining number of months and the associated mortgage balance.
Fixed-Rate Mortgage Benefits
Fixed-rate mortgages are beneficial for a number of reasons, though the fact that your mortgage payment will never change is clearly paramount.
If interest rates rise, homeowners with adjustable-rate mortgages will suffer the consequences of higher monthly mortgage payments, while fixed-rate borrowers can rest assured that their payments will not change under any circumstances.
Fixed mortgage borrowers won’t need to worry too much about where the market is headed either, though it’s wise to monitor interest rates in case a sizable interest rate drop makes it favorable to refinance.
Put simply, the fixed mortgage is a good choice for the borrower that actually wants to pay off their mortgage, and plans to stay in the home (and with the mortgage) for the foreseeable future.
One Downside of a Fixed Mortgage
The only real negative aspect of a fixed-rate mortgage is the higher interest rate, although these days many fixed mortgages price at the same rate or even lower than adjustable-rate mortgages.
Typically, homeowners pay a premium to lock in a fixed mortgage rate, whereas adjustable-rate mortgages may be discounted, especially early on.
So a 30-year fixed mortgage rate may be one percentage point higher than say a 5/1 ARM, but the borrower who goes with the fixed loan is banking on payment stability in exchange for a higher upfront cost. The borrower with the ARM is essentially taking a risk that rates won’t rise in the future.
Another small negative associated with a fixed-rate mortgage is the idea that many homeowners will fail to refinance when a good opportunity comes around because they’re so obsessed with holding on to their low fixed rate.
Basically a homeowner with a fixed mortgage may avoid refinancing in fear of losing that fixed-rate, whereas an ARM-borrower is always keen to shop around in order to save money.
But all in all, fixed mortgages are a good choice for a wide range of borrowers because of the relative low risk and lack of surprise. And with fixed mortgage rates at historic lows, there couldn’t be a better time to obtain one for the long term.
Check out the chart below, which illustrates the interest rate movement of the popular 30-year fixed-rate mortgage over the course of 2010:
Read more: 30-year vs. 15-year mortgage