What Is a Fixed-Rate Mortgage?

The term fixed-rate mortgage refers to a home loan that has a fixed interest rate for the entire term of the loan. This means the mortgage carries a constant interest rate from beginning to end. Terms can range anywhere between 10 and 30 years for fixed-rate mortgages, which are popular products for consumers who want to know how much they'll pay every month.

Key Takeaways

  • A fixed-rate mortgage is a home loan with a fixed interest rate for the entire term of the loan.
  • These mortgage products don't fluctuate with market conditions.
  • Borrowers who want predictability and those who tend to hold property for the long term tend to prefer fixed-rate mortgages.
  • Most fixed-rate mortgages are amortized loans.

How Fixed-Rate Mortgages Work

There are several kinds of mortgage products available on the market. Lenders advertise and offer variable or adjustable-rate mortgage (ARM), or fixed-rate loans. With variable-rate loans, the interest rate isn't fixed. Instead, rates are adjusted above a certain benchmark. These rates tend to change at certain periods. Fixed-rate mortgages, on the other hand, carry the same interest rate throughout the entire length of the loan.

Most mortgagors who purchase a home for the long term end up locking in an interest rate with a fixed mortgage. They prefer these mortgage products because they're more predictable. In short, borrowers know how much they'll be expected to pay each month so there are no surprises. Unlike variable and adjustable-rate mortgages, fixed-rate mortgages don't fluctuate with the market. So the interest rate in a fixed-rate mortgage stays the same regardless of where interest rates go—up or down.

The amount of interest borrowers pay with fixed-rate mortgages varies based on how long they're amortized. Mortgagors pay more in interest in the initial stages of repayment. More money is applied toward the principal later on. So someone with a 15-year term will pay less in interest than someone with a 30-year fixed-rate mortgage. More on this a little further down.

Special Considerations

Most amortized loans come with fixed interest rates, although there are cases where non-amortizing loans have fixed rates, too.

Although most fixed-rate mortgages are amortized loans, there are cases where they can be non-amortized as well.

Amortized Loans

Amortized fixed-rate mortgage loans are among the most common types of mortgages offered by lenders. These loans have fixed-rates of interest over the life of the loan and steady installment payments. A fixed-rate amortizing mortgage loan requires a basis amortization schedule to be generated by the lender.

You can easily calculate an amortization schedule with fixed-rate interest when a loan is issued. That's because the interest rate in a fixed-rate mortgage doesn't change for every installment payment. This allows a lender to create a payment schedule with constant payments over the entire life of the loan. As the loan matures the amortization schedule requires the borrower to pay more principal and less interest with each payment. This differs from a variable-rate mortgage where a borrower has to contend with varying loan payment amounts that fluctuate with interest rate movements.

Non-Amortizing Loans

Fixed-rate mortgages can also be issued as non-amortizing loans. These are usually referred to as balloon-payment or interest-only loans. Lenders have some flexibility in how they can structure these alternative loans with fixed interest rates. A common structuring for balloon payment loans is to charge borrowers annual deferred interest. This requires interest to be calculated annually based on the borrower’s annual interest rate. Interest is then deferred and added to the lump sum balloon payment required by the lender.

In an interest-only fixed-rate loan, borrowers pay only interest in scheduled payments. These loans typically charge monthly interest based on a fixed-rate. Borrowers make monthly payments of interest with no payment of principal required until a specified date.

Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages (ARMs)

Adjustable-rate mortgages are a fixed- and variable-rate hybrid. These loans are also usually issued as an amortized loan with steady installment payments over the life of the loan. They require a fixed rate of interest in the first few years of the loan followed by variable rate interest after that. Amortization schedules can be slightly more complex with these loans since rates for a portion of the loan are variable. Thus, investors can expect to have varying payment amounts rather than consistent payments as with a fixed-rate loan.

Adjustable-rate mortgages are generally favored by people who don't mind the unpredictability of rising and falling interest rates. Borrowers who know they'll refinance or won't hold the property for a long period of time also tend to prefer ARMs. Borrowers typically bet on rates to fall in the future. If rates do fall, a borrower’s interest decreases over time.

Disadvantages of Fixed-Rate Mortgages

There are varying risks involved for both borrowers and lenders in fixed-rate mortgage loans. These risks are usually centered around the interest rate environment. When interest rates rise, a fixed-rate mortgage will have a lower risk for a borrower and higher risk for a lender. If rates are rising, borrowers typically seek to lock in lower rates of interest to save over time. When rates rise, interest rate risk is higher for lenders since they have foregone profits from issuing fixed-rate mortgage loans that could be earning higher interest over time in a variable rate scenario.