What is a fixed mortgage? Your guide to rate stability

A fixed-rate mortgage keeps the same interest rate for the entire loan term. This fixed rate lets the loan's monthly principal and interest payments stay the same throughout the loan term, too.

A fixed loan's stability appeals to homeowners who value predictable housing costs.

In fact, most new home buyers prefer fixed-rate loans even though some buyers could save money with more complex types of mortgages, such as adjustable rate mortgage loans.

What is a fixed-rate mortgage?

A fixed-rate mortgage keeps the same interest rate throughout its entire term, whether the term lasts 10, 15, 20, 30, or sometimes even 40 years.

Once you close a fixed-rate loan, its rate won't change regardless of what happens with the Federal Reserve, 10-year Treasury notes, or other market shifts.

...in as little as 3 minutes – no credit impact

Definition and key features

Fixed-rate mortgages deliver consistent monthly principal and interest payments that simplify long-term budgeting. Your base mortgage payment never changes, though your total monthly payment will shift if property taxes or homeowners insurance costs rise or fall.

Fixed loans follow a pre-set schedule. Most fixed-rate mortgages are fully amortizing, meaning you'll own your home outright once you make all scheduled payments.

How a fixed mortgage differs from other mortgage types

Adjustable-rate mortgages (ARMs) offer the main alternative to fixed-rate loans. ARMs typically lock in a rate for 3, 5, 7, or 10 years. Then, once the initial rate lock expires, the rate changes with market conditions each year. 

ARMs can offer lower rates compared to fixed loans during the early years of the loan. That's why ARMs appeal to buyers who plan to sell or refinance before the lower initial rate period expires. 

Despite this potential for savings, most borrowers still prefer fixed-rate mortgages since they shield homeowners from interest rate volatility. Even if rates climbed to 10% for some reason, a mortgage locked in at 6% would keep its 6% rate.

How does a fixed-rate mortgage work?

Fixed-rate mortgages operate on a simple principle: your interest rate stays locked regardless of market conditions. Lenders set your rate based on market conditions at the time of your closing. A fixed rate also depends on the borrower's credit score, debt load, and down payment size.

Once approved, that locked rate stays constant for the entire loan term, regardless of what happens to the borrower's personal finances or to the broader market for mortgage rates.

...in as little as 3 minutes – no credit impact

Monthly mortgage payment breakdown

The monthly payment for principal and interest on a fixed loan won't change. If the first principal and interest payment due on the loan is $2,000, the 360th and final principal and interest payment will also be $2,000.

But the loan's monthly mortgage payment can still change. Mortgage payments include installments that go toward annual homeowners insurance and property taxes. If taxes go up by $1,200 per year, the mortgage payment will go up by $100 to absorb the higher annual tax payment. Increased insurance premiums can also increase monthly mortgage payments.

Amortization over time

Even though principal and interest due each month won't change, the way principal and interest get allocated each month will change each month.

For example, if your principal and interest payment was $2,000, each payment would break down that $2,000 differently. 

The first mortgage payment will be skewed heavily toward interest. As time passes, each monthly payment allocates a little more toward principal and a little less toward interest. By the 360th and final payment on a 30-year loan, almost all of the payment goes toward principal. 

Equity builds gradually, then picks up steam

This amortization schedule explains why equity builds slowly at first and then accelerates. After making payments on a $400,000 loan for 10 years, for example, you might owe $340,000. After 20 years, that balance drops to $200,000.

Homeowners with fixed rate loans can lower their balance faster by making extra payments onto principal.

Types of fixed-rate mortgages

Not all fixed-rate mortgages are the same. 

15-year vs. 30-year terms

Term length changes a loan's payment, total costs, and amortization schedule:

• A 30-year fixed-rate mortgage spreads payments over more time, creating lower monthly payments that many homeowners find manageable.
• Shorter loan terms, like a 15-year fixed, increase monthly payments but cost less over the life of the loan.

Consider a $350,000 mortgage at 6.5% interest. The 30-year option requires monthly payments of about $2,212, while a 15-year term at 5.5% charges about $2,862 monthly. Because of its higher payment, the 15-year loan saves over $200,000 in total interest and builds equity faster.

Conventional vs. government-backed options

Conventional fixed-rate mortgages include conforming loans, which meet Federal Housing Finance Agency guidelines, and Jumbo loans that can finance higher value property.

Government-backed fixed loan options include FHA, VA, and USDA loans. Each loan type targets a specific borrower group. VA loans work only for active duty military members and veterans. USDA loans work only for moderate-income borrowers in rural areas.

Credit score requirements:

• Conventional loans: Typically 620 or higher credit score required
• FHA loans: Accepts scores as low as 580
• USDA and VA loans: Varies by lender; usually 620 to 640

Down payment differences:

• Conventional: Usually 3% to 20% down
• FHA: As low as 3.5% down
• USDA and VA: Usually 0% down

Fixed-rate mortgage vs. adjustable-rate mortgages

Fixed-rate mortgages work best for homeowners who plan to keep their loans for decades. Adjustable-rate loans can cost less early in the loan term at the risk of paying a higher interest rate later. 

Yet some homebuyers are willing to trade stability for a variable interest rate's potential to save more money. 

What is an adjustable-rate mortgage?

An adjustable-rate mortgage starts with a fixed interest rate for an intro period which typically lasts 3, 5, 7, or 10 years. When this initial rate expires, the remaining mortgage balance gets recast at a new rate, one that matches economic conditions at that time.

Then, the rate continues to change at set intervals, usually once a year. 

Today's ARMs include rate caps that limit how much your interest rate can increase per adjustment period and over the loan's lifetime. For example, a 5/1 ARM might cap rate increases at 2% per adjustment and 5% over the loan's life.

Why would someone choose a rate that will fluctuate?

An adjustable-rate mortgage loan (ARM) can appeal to buyers who plan to move or refinance within a few years. Since an ARM's initial mortgage rate is typically lower than a fixed loan rate, these homeowners can use an ARM to pay less each month. Since they're planning to sell the home before its initial rate expires, they don't have to worry about future rate volatility. 

Other buyers use the lower initial rate on an ARM to qualify for a larger loan size, which gives them the ability to buy a more expensive home. Then they can refinance the home later, once repaying some of its principal.

Another group of homebuyers likes ARMs because they expect mortgage rates to go down before their rate adjusts. These buyers should remember that no one can accurately predict how rates will change in the future.

Pros and cons of fixed-rate mortgages

Most buyers like the simplicity of a fixed rate, but there are pros and cons to all loan options:

Pros of fixed-rate mortgages

– Rate protection: Your interest rate stays locked regardless of market conditions, shielding you from rising rates that could increase your monthly payments by hundreds of dollars.

– Simplified budgeting: Knowing your exact principal and interest payment for the entire loan term eliminates guesswork from monthly planning, especially valuable for families with fixed incomes.

– Long-term planning: Fixed payments make it easier to calculate total interest costs and plan major financial decisions like retirement savings or college funding.

Cons of fixed-rate mortgages

– Higher starting rates: Lenders typically charge half a percentage point or so more for fixed-rate loans compared to initial ARM rates.

– No automatic savings: When market rates drop, you won't benefit unless you refinance, which involves closing costs that can range from $3,000 to $6,000 on a typical loan.

– Limited flexibility: Unlike ARMs that might decrease your payments when rates fall, fixed-rate loans keep payments constant even during periods of declining interest rates.

The choice between accepting higher initial costs for payment certainty versus potentially saving money with variable rates depends on your risk tolerance and how long you plan to keep the loan.

How to get a fixed-rate mortgage

Hundreds of mortgage lenders offer fixed-rate mortgages to home shoppers every day. 

Before applying for a loan, borrowers should:

Review finances

Check your credit score first, as this determines your loan eligibility and influences the new loan's fixed interest rate. Conventional loans typically require a minimum score of 620, though borrowers who meet the minimum score may need to compensate by making a higher down payment.

FHA loans offer an alternative for borrowers with average credit. FHA lenders can accept scores as low as 580 while still requiring only 3.5% down. That's $10,500 down on a $300,000 home. 

Buyers also need enough cash to cover at least some of the loan's closing costs which range from 3% to 6% of the loan amount. These fees cover appraisals, title insurance, and lender charges, expenses that add up quickly on larger loans.

Another variable to know about: Debt-to-income ratio, or DTI. This measures how much you can afford to spend on a monthly mortgage payment. 

Most lenders cap your total monthly debt payments at 43% to 45% of your gross income. This includes your new mortgage payment, credit cards, car loans, and other obligations.

Get preapproved

When you know where you stand financially, applying for preapproval shows your eligibility from the lender's point of view. Many lenders, including Better Mortgage, require only a soft credit check for preapproval, meaning the process won't hurt your credit score and creates no obligation.

Preapproval shows how much you could borrow and estimates your rate. It also tells home sellers you're serious about your offer to buy their home.

Lock your rate and close

Once you've found your home, it's time to make the mortgage application official and lock in the loan's rate. Rate locks typically last 30 to 60 days, giving you time to complete the purchase process.

Review all loan documents carefully before closing. Verify that your interest rate, loan term, and monthly payment match what you agreed to pay. Discrepancies should be discussed immediately with your lender.

Choose your loan term based on your financial goals and budget. Shorter terms build equity faster but require higher monthly payments, while longer terms keep payments manageable but cost more in total interest.

Most first-time buyers get 30-year fixed rate loans.

FAQs about fixed-rate mortgages

How could an economic slowdown impact my fixed-rate mortgage?

When you have a fixed mortgage, your monthly principal and interest payments stay the same regardless of economic conditions. That's the core benefit of a fixed-rate loan. If an economic slowdown drives interest rates lower after you close, you could refinance to capture these savings, but you'd also need to pay closing costs again.

When does a fixed-rate mortgage make more sense than an adjustable one?

Fixed-rate mortgages work best for buyers who plan to stay in the home indefinitely. ARMs appeal to buyers who plan to move in a few years, before the rate starts to change. 

What is a 5-year fixed-rate mortgage?

A 5-year fixed-rate mortgage locks your interest rate for five years, then typically converts to an adjustable rate. This hybrid approach gives you initial payment stability while potentially offering rate flexibility later. These loans are less common than traditional 15- or 30-year fixed-rate options.

Are there any disadvantages to fixed-rate mortgages?

Yes, fixed-rate mortgages typically come with higher initial interest rates compared to adjustable-rate mortgages. Additionally, if market rates fall, fixed-rate borrowers don't automatically benefit unless they refinance, which creates more costs and paperwork.

Simplicity and predictability can help home buyers

There's a reason fixed-rate mortgages remain the most popular way to finance a primary residence. They're simple and predictable when compared to other loan options.

Better Mortgage seeks to make the borrowing process simple and predictable for home buyers by offering intuitive online applications and tools.

Our AI-driven preapproval process can estimate your rate and payment in as little as three minutes with a soft credit check that won't hurt your credit score.

...in as little as 3 minutes – no credit impact