A fixed-rate mortgage is a house loan with a set interest rate. The majority of mortgages are fixed-rate loans.
The fundamental advantage of fixed-rate mortgages is that their payments are generally predictable. For the loan duration, the principal and interest payments are the same each month.
The Basics of Fixed-Rate Mortgages
A fixed-rate mortgage is fully amortizing, which means that the principal and interest owed to your lender are entirely paid off when the loan expires. Some interest is repaid as part of each monthly payment. The remainder is applied to the amount you owe.
In the early years of a fixed-rate mortgage, most of the payment goes to interest; later, the majority goes to principle. This ease of use contrasts with the complication of an adjustable-rate mortgage, or ARM, which has a variable interest rate and several loan conditions and payments.
Terms commonly used in fixed-rate mortgages
A loan term refers to how long you have to repay the principal and interest by making equal monthly installments. When looking for a fixed-rate mortgage, you may come across the following terms:
The most common fixed-rate mortgage loan is one with a 30-year term. Your monthly payments and the total interest you’ll pay at the end of the loan are the lowest with this loan. But, you might pay more interest overall because your loan term is longer, and you’ll be making payments for a longer period.
Lower interest rates make 30-year mortgages a little more affordable, so many borrowers choose one with a 30-year term.
You pay more each month with a 15-year mortgage, but the average interest paid over the life of the loan is less.
Because you’re paying the loan off faster with a 15-year mortgage, you might qualify for the same loan amount as someone with a 30-year mortgage, even if you have a lower income or can afford less.
The shorter-term of a 15-year mortgage requires you to pay more interest and make it more affordable if you’re concerned about making payments over a longer period.
See how much you could save with a 15-year mortgage.
Some lenders provide 20-year fixed mortgages. Monthly payments for a particular loan amount are more reasonable than a 15-year mortgage but less affordable than a 30-year mortgage. Rates on 20-year fixed mortgages are compared.
A 10-year fixed-rate mortgage is for borrowers who want to pay off their loan quickly and can afford larger monthly payments. Rates on a 10-year fixed mortgage are available for comparison.
Fixed vs. Variable Interest Rates
Fixed interest rates don’t change over the life of the loan, so your mortgage payments are easy to budget.
An ARM’s (adjustable-rate mortgage’s) interest rate is fixed for an initial period. After that, the rate may change on a regular schedule. ARMs typically have a low “teaser rate” that lasts for the first year of the loan. After the fixed term ends, the interest rate resets.
Interest rates are a big part of making a fixed-rate mortgage more or less affordable. Read about how interest rates affect affordability.
When interest rates rise, as they did in the mid-2000s, ARMs look like a better option. But when rates fall, fixed rates are a better deal.
Keep in mind that the rate you start with isn’t guaranteed. Future rate increases or decreases are one of the main risks of an adjustable-rate loan.
The higher the starting interest rate on your ARM, the more you’ll pay in interest over the life of the loan.
Fixed-rate payments are a predictable and straightforward way to pay for your home.
Fixed-rate loans might have higher interest rates than adjustable-rate mortgages, but you can plan for your mortgage payments to stay the same.
But if interest rates are likely to rise, an ARM can be a better deal. An ARM’s initial interest rate is lower, which means lower payments while you’re building equity in your home.
If you’re looking for a mortgage lender in Sacramento, you’ve come to the right place. Mortgages and loans can be tricky to navigate for many homeowners, but with the help of Hawkins Home Loans, this process becomes infinitely easier. Contact us today to learn more!