Considering a Fixed-Rate Mortgage? Here’s What You Should Know

A fixed-rate mortgage is the most common type of mortgage. Its popularity is due to the benefits you can receive from this loan type, but it’s important to consider some of the drawbacks as well. Learn about how fixed-rate mortgages work, the different types and why a fixed-rate mortgage may be a good option for you.

How do Fixed-Rate Mortgages Work?

A fixed-rate mortgage is a loan with an interest rate that does not change for the entire term of your loan. Unlike an adjustable-rate mortgage (ARMs), where your interest rate may change over time based on current economic conditions, the interest rate on a fixed-rate mortgage will remain the same regardless of variations in market interest rates.

Because of this, the primary benefit of a fixed-rate mortgage is how it protects you from inflation.

• If mortgage rates increase, your rate will not change during your mortgage term.
• If mortgage rates decrease, you have the option to refinance to take advantage of the lower rates.

Although your interest rate will not change over the life of your loan, your monthly mortgage payment may. This is because your monthly mortgage payment includes more than unchanging elements like principal and interest. It also includes taxes and insurance, which can change annually and may result in increases to your monthly payment.

In addition, the introductory rates offered by ARMs are typically lower than fixed-rate mortgage rates. With a fixed-rate mortgage, you may pay more at the beginning of the loan compared to an ARM, but you do not have to worry about your rate increasing at any point during the life of the loan.

What Are the Different Types of Fixed-Rate Mortgages?

There are two primary types of fixed-rate mortgages that lenders offer: 15 years and 30 years. Many also offer 20-year fixed rate mortgages, and some lenders offer even more term options.

• 30-year term: With this term, your monthly payment will be lower because the loan term is longer. Interest rates are typically higher and you will pay more interest over time.
• 15-year term: With this term, your monthly payment will be higher because the loan term is shorter. Interest rates are typically lower than with a 30-year fixed-rate  mortgage and you will pay less interest over time. In addition, the shorter term will help you build equity faster.

The longer the term, the lower your monthly payment but the more interest you will pay over time.

When Should You Consider a Fixed-Rate Mortgage?

Many homeowners choose a fixed-rate mortgage for the stability of a more consistent monthly payment amount.

With a 30-year fixed-rate mortgage, after 30 years of on-time monthly payments your mortgage will be fully paid off. And because the rate is fixed, you can review your amortization schedule to know exactly how much you are paying in principal and interest with each monthly payment.

Knowing your monthly payment is likely to remain relatively similar over the life of your loan can help you increase your spending power over time and budget for the long term.