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A fixed-rate mortgage (FRM) can give you peace of mind by protecting you from interest rate increases and providing you with consistent monthly payments. Predictable payments help with your personal budgeting, but make sure you weigh the benefits and drawbacks before signing on the dotted line.
What is a fixed-rate mortgage (FRM)?
A fixed-rate mortgage has an interest rate that stays the same for the life of the loan — keeping monthly payments consistent. FRMs are for borrowers who want the security of a fixed rate and those who plan to stay in their home for a while. Since the rate is locked in, changes in the market won’t affect your monthly payments.
How long do I repay a fixed-rate mortgage?
It depends on the term. If you have a 30-year fixed mortgage, for example, you would make payments for 30 years unless you sell the home or refinance. If you refinance to a shorter term — a 15-year fixed, for example — you would pay your mortgage for 15 years.
Fixed-rate mortgage examples
The most common FRM terms are for 15, 20 and 30 years, and they typically require a down payment of between 3% and 20%.
If you took out a loan of $400,000 at 6.5% interest over a 30-year period, for example, you would have standard monthly payments of about $2,530. Different rates and terms will affect your payments:
|Home loan amount||Loan length||Interest rate||Monthly payment|
How does a fixed-rate mortgage work?
Generally, the longer the term of the fixed-rate mortgage, the lower your monthly payments and the more interest you’ll pay over the life of the loan. On the other hand, the shorter the loan term, the lower your rate and the quicker you’ll build equity in your home. Though your monthly payments will be higher with a shorter term.
30-year fixed-rate mortgage
The 30-year fixed-rate mortgage is one of the most popular types of conventional fixed mortgages. Keep in mind that, although your monthly payments may be lower, you’ll pay more interest over the life of the loan.
While a 30-year fixed protects you from changing market conditions that may increase your payments, it also means you’re unable to take advantage of lower interest rates unless you refinance.
A 30-year fixed rate mortgage can be useful when:
- You intend to stay in the home for a long period of time
- You believe interest rates will increase
- You don’t expect your income to increase in the near future
20- or 15-year fixed-rate mortgage
Although your monthly payments is higher with a 15-year or 20-year fixed rate mortgage, you pay less interest with a shorter loan term. You can pay off your loan sooner.
While a 20- or 15-year fixed-rate mortgage provides you with consistent interest payments for the life of the loan, your monthly payment works out to be around 10% to 15% higher than a 30-year standard fixed mortgage.
A 20- or 15-year fixed-rate mortgage may be useful when:
- You plan to retire within 20 years or less
- You want to own your home quickly
How is the fixed-rate interest calculated?
Banks use several factors to set the interest rate for fixed-rate mortgage products. The United States Federal Reserve determines the requirements your lender follows when it sets the interest rate.
Banks also take into account the prime rate and the level of competition within the market. Banks consider economic factors such as inflation, the demand for money throughout the country and stock market levels.
Pros and cons of a fixed-rate mortgage (FRM)
- Predictable payments. Consistent rates for the life of the loan means consistant, predictable monthly payments.
- Simplicity. FRMs are generally easier to compare than adjustable-rate mortgages (ARMs) since the math is more straightforward and you don’t have to consider the complex indexes and margins associated with ARMs.
- Pay down the principal. Most FRMs don’t have restrictive prepayment penalties, so you could make extra payments toward the principal without a penalty. Find out your lender’s policies before attempting to pay down your mortgage early.
- Protected from inflation. Regardless of changes to inflation in the market, your interest rate remains stable throughout your loan term.
- Upfront costs. Closing costs such as origination fees and underwriting fees are often higher for FRMs compared to other types of loans.
- Market risk. You won’t benefit from any drop in interest rates unless you refinance.
- Higher rates. FRMs typically come with higher average introductory interest rates compared to those offered during the initial period for ARMs.
- More difficult to qualify. Due to higher upfront costs and a higher comparable interest rate, borrowers with poor credit or a small down payment may find it difficult to qualify for competitive terms with a FRM.
Is a fixed-rate mortgage right for me?
Though it depends on several factors and your personal situation, FRMs may be the best fit when:
- Rates are low. If interest rates are low, it may be a good time to lock in a competitive rate.
- You plan to stay put. If you intend to live in your property for five years or more, the upfront charges may make it more cost-effective over a longer loan term.
- You have good credit. A lender looks at your credit score to measure your risk or repayment. If you have poor credit, you won’t qualify for the best rates.
- You value stability. FRMs is best suited for borrowers who are risk-averse and prefer to have stability, certainty and consistency of their monthly payments.
- You need to budget. By virtue of their fixed monthly payments, FRMs are predictable, which helps a borrower arrange their personal budget.
A fixed-rate mortgage can provide you with security and stability, but if you’re not entirely sure if it’s a fit for your financial situation, compare a few mortgage options before making a decision.
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