Fixed Interest Rate

What is a 'Fixed Interest Rate'

A fixed interest rate is an interest rate on a liability, such as a loan or mortgage, that remains fixed either for the entire term of the loan or for part of this term. A fixed interest rate may be attractive to a borrower who feels that the interest rate might rise over the term of the loan, which would increase his or her interest expense. A fixed interest rate, therefore, avoids the interest rate risk that comes with a floating or variable interest rate, wherein the interest rate payable on a debt obligation depends on a benchmark interest rate or index.

BREAKING DOWN 'Fixed Interest Rate'

While a home buyer in the United States can obtain a mortgage with a fixed interest rate for the full 30-year term of his or her mortgage, in Canada, a home buyer can only "lock in" or obtain a fixed interest rate for a maximum of five to seven years of a 25-year mortgage.

Borrowers are more likely to opt for fixed interest rates during periods of low interest rates, since the opportunity cost, if interest rates go lower, is still much less than during periods of high interest rates.

RELATED TERMS
  1. Variable Rate Mortgage

    A type of home loan in which the interest rate is not fixed. ...
  2. Floating Interest Rate

    An interest rate that is allowed to move up and down with the ...
  3. Variable Interest Rate

    An interest rate on a loan or security that fluctuates over time, ...
  4. Lock Period

    A number of days, often 30 or 60, during which the interest rate ...
  5. Capped Rate

    An interest rate that is allowed to fluctuate, but which cannot ...
  6. Mortgage

    A debt instrument, secured by the collateral of specified real ...
Related Articles
  1. Mutual Funds & ETFs

    Financial Institutions: Stretched Too Thin?

    Find out how to evaluate a firm's loan portfolio to determine its financial health.
  2. Home & Auto

    Mortgages: Fixed Rate Versus Adjustable Rate

    Choosing the right mortgage can help homebuyers avoid costly mistakes. Learn the difference between fixed- and adjustable-rate loans.
  3. Economics

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  4. Investing Basics

    Managing Interest Rate Risk

    Interest rate risk stems from the possibility that an interest-bearing asset’s value will change due to changing interest rates.
  5. Credit & Loans

    Understanding Home-Equity Loan Rates

    Shopping is the most important part of getting a home-equity loan. You're going to have to live with the terms for a long time.
  6. Economics

    How Interest Rates Affect The Housing Market

    Understand how rate changes can affect home prices, and learn how you can keep up.
  7. Credit & Loans

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  8. Economics

    Effect of Fed Fund Rate Hikes on the Housing Market

    Understand what drives the federal funds rate and why the Fed would increase that rate. Learn about the effect of a rate increase on the housing market.
  9. Credit & Loans

    Mortgages: Fixed-Rate Versus Adjustable-Rate

    Both of these have advantages and disadvantages depending on your financial needs and prospects.
  10. Economics

    Forces Behind Interest Rates

    Get a deeper understanding of the importance of interest rates and what makes them change.
RELATED FAQS
  1. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ... Read Answer >>
  2. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    Fixed ARP and variable APR loans operate differently but serve the same purpose: to collect interest from a borrower so the ... Read Answer >>
  3. What are the different types of subprime mortgages?

    Clarify your understanding of subprime mortgages. Learn about the different types, how they work and when they might be beneficial. Read Answer >>
  4. What are the pros and cons of a simple-interest mortgage?

    Learn the difference between a simple interest mortgage and a standard mortgage, along with their relative advantages and ... Read Answer >>
  5. What is the difference between real and nominal interest rates?

    Learn what nominal interest rates and real interest rates are, how real interest rate takes into account the inflation rate, ... Read Answer >>
  6. What are the advantages of using an effective interest rate figure?

    Understand what is meant by the effective interest rate, and learn why the effective rate calculation is preferred over the ... Read Answer >>
Hot Definitions
  1. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  2. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  3. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  4. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
  5. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  6. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS ...
Trading Center