What Is a Fixed-Rate Mortgage?

You know that you want a mortgage with a low interest rate. After all, snagging a lower interest rate will save you money over the life of your loan. However, when it comes to a fixed rate, you’re not as confident of your move. If it’s not broken, does it need to be fixed? What is a fixed-rate mortgage?

As Investopedia explains, a fixed-rate mortgage is a mortgage that has a consistent interest rate for the entire length of the loan. Once the rate is locked in, it doesn’t fluctuate with market conditions, so you know what to expect. For contrast, consider the adjustable-rate mortgage, or ARM. With an ARM, the interest rate is tied to certain factors in the market, and it rises and sinks periodically. These unpredictable loans can be quite a gamble for borrowers. The rise and fall can work in your favor or cost you dearly. That’s one of the reasons why borrowers prefer to stick with fixed-rate loans. But how do fixed-rate loans work? What advantages do they offer? What drawbacks might make borrowers hesitate? Let’s explore the details.

How Fixed-Rate Mortgages Work

A fixed-rate mortgage is a fully amortizing loan. When you reach the end of the loan’s term and make the final payment to your lender, you will have paid off the total amount of the principal and interest that you owe. However, as NerdWallet notes, those payments aren’t evenly split between principal and interest. Your early payments are mostly interest; the balance of principal and interest shifts as your loan progresses. If you’d like to see how your payments break down, you can find amortization schedules online.

Pros of Fixed-Rate Mortgages

Fixed-rate loans are popular with borrowers and are readily available in terms of 10, 15, 20, and 30 years. As The Balance reports, these loans offer a number of appealing advantages:

Fixed-rate loans offer stability. You know what you’ll be paying in terms of principal and interest every month.
You’re protected from market volatility. You don’t have to worry that jumps in the market will send your mortgage payment soaring.
Fixed-rate loans are easier to understand. Adjustable-rate loans are complicated, making comparison shopping difficult. Fixed-rate loans are simpler, so borrowers often feel like they have a better sense of what they are getting into.

Cons of Fixed-Rate Mortgages

As Realtor.com indicates, fixed-rate loans do have their downsides:

Fixed-rate loans don’t come with low introductory rates. Adjustable-rate loans often start out with low teaser rates at the beginning of the loan. For experienced borrowers who only plan to keep a property for a short period, that can be a valuable feature that outweighs the stability promised by a fixed-rate loan.
Closing costs are sometimes higher. Lower closing costs are often among the perks offered with adjustable-rate loans.
Refinancing is the only way to change your rate. Borrowers with fixed-rate loans can breathe a sigh of relief when general rates go up, and their rate stays the same. However, they may feel frustrated when rates go down, but theirs holds still. If you have a fixed-rate loan, refinancing is normally required to take advantage of falling interest rates.

When Should You Opt for a Fixed-Rate Mortgage?

What is a fixed-rate mortgage good for? How do you decide between a fixed-rate and an adjustable-rate loan? According to a Motley Fool, most people will find that the fixed-rate mortgage is the better choice for their needs. This is particularly true if you’re buying at a time when interest rates are low and you’re planning to stay in the home for more than five years. What about adjustable-rate loans? This is an option to think about if you’ll be in the home for less than five years, you expect interest rates to drop, or you expect your income to rise enough to deal with the higher mortgage payments.

What Is a Fixed-Rate Mortgage?