Dock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Dock David Treece ContributorDock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Written By Dock David Treece ContributorDock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Dock David Treece ContributorDock David Treece is a former licensed investment advisor and member of the FINRA Small Firm Advisory Board. His focus is on breaking down complex financial topics so readers can make informed decisions. He has been featured by CNBC, Fox Business, Bl.
Contributor Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Rachel Witkowski Correspondent/EditorRachel Witkowski is an award-winning journalist whose 20-year career spans a wide range of topics in finance, government regulation and congressional reporting. Ms. Witkowski has spent the last decade in Washington, D.C., reporting for publications i.
Updated: Nov 2, 2022, 1:44pm
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A fixed-rate mortgage is a type of loan that is secured by real estate and has an interest rate that remains unchanged during the mortgage term. These mortgages are ideal for borrowers who want to lock in their interest rate and always know what their monthly payment will be and how much interest they’ll pay over the life of their loan.
Fixed-rate mortgages are one of the most common types of real estate loans, along with adjustable-rate mortgages, which may see interest rate changes over time. Fixed-rate loans charge the same interest rate throughout the loan term. And, as mortgages, these loans are backed by your property, which your lender can seize if you default. Fixed-rate mortgages are common loans for financing both homes and commercial property.
To understand a fixed-rate loan, you should know these mortgage loan definitions:
Using a fixed-rate mortgage starts with a home loan application. Here are the steps:
Once you close on your loan, you’ll make regularly scheduled payments (typically monthly). For each payment you make, a portion will cover the interest that accrues between payments, and the remainder will go toward mortgage principal. In the early years of your mortgage, a larger portion of each payment goes toward interest, while, in later payments, most goes toward principal.
Every fixed-rate mortgage has a set interest rate, a set payment schedule and a set term. For instance, a home loan might be at 3.75% for 30 years with monthly payments. A commercial property loan might be at 5% for 15 years with quarterly payments. In any event, with a fixed-rate loan, the borrower will know exactly what their payment is for the entire term of the loan.
If the loan is fully amortized—meaning you won’t be required to make a lump-sum, or balloon payment, at the end of the term—and your never make an extra payment, you’ll know exactly when the loan will be paid off and how much interest you’ll pay over the life of the loan.
If you pay more than is required any given month, any extra money will go directly toward the principal outstanding on your loan. Just be sure to tell your servicer to direct the extra money to your principal. When you make extra payments, you’ll pay off your loan earlier than your term suggests.
Fixed-rate mortgages usually last between 10 and 30 years (the most common terms are 10, 15 and 30 years). There are some loans with shorter or longer terms, though longer can be hard to find.
If a loan is fully-amortized, then the loan will be repaid at the end of the term. If the loan isn’t fully-amortized, then you may owe a balloon payment at the end of the term if you don’t refinance or make extra payments.
Longer-term loans usually require lower payments than shorter-term loans because the principal payments are spread out. However, interest rates are usually a little higher for longer-term loans because the odds of default are slightly higher.
You may want to get a shorter-term mortgage to:
While there can be clear advantages to shorter-term loans, you may want a longer-term loan if you want lower payments. Or, you may want the flexibility to make extra payments each month (when you can) that count directly against your loan principal.
In addition to different terms, there are also different types of fixed-rate mortgages. For example, you can get a fixed-rate mortgage for both residential and commercial property, though they have different interest rates and terms.
Most loans are fully-amortized and will be paid off at the end of the term, though there are also balloon loans that will require a lump-sum payment at the end of the term. You may also refinance to avoid a balloon payment.
Fixed-rate loans may also be classified as private loans or government-insured loans, such as those backed by the Federal Housing Administration or the U.S. Department of Agriculture.
For residential loans, you can apply for conforming loans—those that fall within federal guidelines that allow government-backed entities to purchase the loans and sell them to investors—and nonconforming loans, including jumbo loans that are for amounts that exceed the limit for conforming loans.
A fixed-rate loan may be your best option when:
But using a fixed-rate loan isn’t always an option. If you have questionable credit or can only only afford a small down payment, you may not be able to qualify for a fixed-rate mortgage. If a fixed-rate mortgage isn’t an option—or if you can qualify for a loan with a higher rate—then you may want to consider another type of mortgage.
Interest rates for fixed-rate mortgages are constant for the entire term of a loan. An adjustable-rate mortgage, or ARM, on the other hand, has an introductory rate that remains constant for the first several years of a mortgage (typically five, seven or 10 years).
After the introductory period expires, an ARM’s interest rate changes based on an underlying index, like the prime rate. Then, the rate changes again periodically after the first adjustment—usually every year.
In addition to ARMs, some lenders also offer variable rate loans. These loans are never set—they fluctuate (or float) from month to month based on an underlying rate like the London Interbank Offered Rate (LIBOR) or prime rate.
