Fixed-rate mortgages (FRMs) are fully amortized mortgage loan packages with interest rates that remain unchanged throughout the life of the loan. With FRMs, homeowners can count on a steady and predictable monthly payment during the loan term. It's widely accepted that FRMs are not only the most basic home loan packages, but they're also the most commonly used.
Unlike an adjustable-rate mortgage (ARM), the interest rate on the FRM isn't based on an index. The rate's actually based on the borrower's risk profile and on the risk of the market rate going up. In the initial years, the FRM rate would always be higher than that of the ARM for the same borrower. This is because with an FRM, the lender must carry the risk of the market rates increasing (unlike the ARM, which puts that risk on the borrower).
"Fixed-rate mortgages are for home buyers who want a simple, reliable monthly payment with an unchanging rate of interest."
An FRM's main advantage is the security of knowing that you're locked in with your interest; you don't have to worry about any increases in the amount you're expected to pay each month. The one disadvantage is that the rate you agree to pay may be a high market interest rate at the time the loan is originated. You'll be expected to pay that rate even if the market rates drop.
Fixed-rate home loans are typically categorized by the length of the loan term; there are four common FRM packages that circulate the market. Depending on your plans for the future and your budget, choosing a loan term is an important task. Negotiating with your lender for a better rate is crucial for loans that span longer loan terms. Generally speaking, the longer the loan term, the lower you should negotiate your rate to be. Fixed-rate mortgages come in the following term lengths.
Fixed-Rate Mortgage Products
- 10-year FRM
- 15-year FRM
- 20-year FRM
- 30-year FRM
Would a Fixed-Rate Mortgage Be Right for You?
When compared to the wildly different adjustable-rate mortgage, fixed-rate mortgages are fairly simple to understand. Home buyers need not fear any changes to their monthly payment, and can budget ahead with ease. Financially savvy borrowers also use FRMs to lock in rates during periods of low market rates. When the market rates rise, the borrower's rate will stay fixed. Over the years, this could lead to massive savings.
Planning for an FRM really only depends on the length of the loan term and the rate you agree to pay. Generally, the longer the term, the higher the rate of interest that lenders will offer. The shorter the term, the lower the rate of interest. (It's really that simple!) The downside is that the only way to change your monthly payments or rate would be through refinancing, which can be a tedious process.
Fixed-Rate Mortgage Pros
- Unchanging rate of interest
- Fully amortized over the length of the loan
- Predictable monthly payments
- Possible to lock in a low rate if the market rate is low at the time of closing
- Choices of loan terms offer flexibility for borrowers
Fixed-Rate Mortgage Cons
- Possible to get "trapped" with a high interest rate
- Higher rates / monthly payments than other loan programs
- Refinancing is the only way to get a lower rate
- May be harder or impossible to refinance when necessary, depending on the borrower's financial profile