## What is a 'Fixed-Rate Payment'

A fixed-rate payment is the amount due every period by a borrower to a lender under a fixed-rate loan. The fixed-rate loan payments will be equal amounts until the loan plus interest are paid in full. The payment amount can be calculated using the following formula:

Where:
P is the constant payment you make every period
R is the interest rate per period
N is the number of periods
Loan is the total loan amount

A fixed-rate payment is also referred to as a vanilla wafer payment.

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## BREAKING DOWN 'Fixed-Rate Payment'

Loans taken out by borrowers have interest rates attached to them that are either floating or fixed. Some loans can even be interest-only, under which there are no required principal repayments. Floating, or variable, interest rates on a loan fluctuate and vary as market interest rates change. Loan payments will, therefore, change periodically as interest rates change. If interest rates increase, floating-rate payments will also increase, and vice versa.

On the other hand, fixed interest rates remain unchanged for the entire duration of the loan. Regardless of the changing rates in the markets, a borrower will make the same payments monthly, hence, the term 'fixed-rate payment.' The payments on a fixed-rate loan are blended, meaning that the interest and principal are combined in an equal monthly amount that does not change over the term of the loan. Typically, this term is used in the home loan industry to refer to payments under a fixed-rate mortgage which are indexed on a common amortization chart.

For example, the first few lines of an amortization schedule for a \$250,000, 30-year fixed-rate mortgage with a 4.5% interest rate looks like this:

 Month Month 1 Month 2 Month 3 Total Payment \$1,266.71 \$1,266.71 \$1,266.71 Principal \$329.21 \$330.45 \$331.69 Interest \$937.50 \$936.27 \$935.03 Total Interest \$937.50 \$1,873.77 \$2,808.79 Loan Balance \$249,670.79 \$249,340.34 \$249,008.65

For example, the first few lines of an amortization schedule for a \$250,000, 30-year fixed-rate mortgage with a 4.5% interest rate looks like this:

 Month Month 1 Month 2 Month 3 Total Payment \$1,266.71 \$1,266.71 \$1,266.71 Principal \$329.21 \$330.45 \$331.69 Interest \$937.50 \$936.27 \$935.03 Total Interest \$937.50 \$1,873.77 \$2,808.79 Loan Balance \$249,670.79 \$249,340.34 \$249,008.65

To calculate R, interest rate per period, take the yearly interest rate and divide by the number of payment periods in a year. For example, if you pay monthly and your yearly interest is 5%, then your interest per period will be (0.05/12) = 0.004167, or 0.4167%.

To calculate N, number of periods, take the duration of the loan in years and multiply it by the periods in a year. For example, if you have a 25-year loan that you pay monthly, the total periods will be 12 X 25 = 300.

For example, consider a 25-year fixed-rate mortgage of \$250,000 with 5% interest rate. If payment is to be made monthly, the fixed-rate payment can be calculated as:

Fixed payment = [0.004167 ÷ (1 - (1 + 0.004167)-300] x \$250,000

Fixed payment = \$1,461.53

The payment of \$1,461.53 is the sum of monthly principal and interest amounts. An amortization schedule reflects the fact that each periodic payment is the same amount. However, early in the schedule, the higher portion of each payment is interest; later in the schedule, the majority of each payment covers the loan's principal.

While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan's principal.
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