Fixed-Rate Mortgages: What It Is and How It Works

Written by Samantha CatheyReviewed by Nathan Brown, CFP®Updated: 29th Apr 2022
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Like a birthday every year. Like leaves falling every autumn. Like Tom Brady going to the Super Bowl.

Some things in life can always be counted on, and a fixed-rate mortgage is no exception.

It’s no wonder 90% of homeowners today use this type of mortgage to finance their home.

What is a Fixed-Rate Mortgage?

Like its name suggests, a fixed-rate mortgage has an interest rate that remains constant for the life of the loan.

This means monthly payments of principal and interest stay the same, not necessarily the entire payment which can fluctuate slightly due to property taxes and insurance premiums.

Still, fixed-rate mortgages provide the security and stability that most families desire, and with rates so low nationally, they are more popular than ever.

>> More: Compare the Best Mortgage Lenders

How Fixed-Rate Mortgages Work

Fixed-rate mortgages come in 10-, 15-, 20- and 30-year terms, or lengths, with a 30-year option being the most common.

A longer term enables families to borrow more, allowing them to focus on other financial goals such as an emergency savings account or college tuition.

Like with any loan, it’s important to shop different lenders and apply for preapproval by submitting the appropriate documentation.

Lenders may include banks, credit unions, online mortgage lenders, the Department of Veteran Affairs, the United States Department of Agriculture, and the Federal Housing Administration.

With an applicant’s credit score and debt-to-income ratio (monthly debt/gross income) in mind, the lender will determine how much money their institution is willing to give and at what interest rate.

Securing preapproval strengthens buying credibility, puts individuals in a better negotiating position, and accelerates the closing process.

Fixed-Rate Mortgage Terms

30-Year Fixed

In a 30-year fixed term, monthly payments are the lowest since they are spread out over more years. But that also means borrowers will pay plenty more interest over the life of the loan.

Generally, the interest rate is higher, as well in comparison to shorter-term and adjustable-rate loans.

20-Year Fixed

These are not the most common of terms, but a 20-year fixed mortgage provides the affordability of a longer-term loan with the interest-savings benefits of a shorter-term loan. It’s essentially a combo of a 15- and 30-year fixed term.

15-Year Fixed

As loan terms get shorter, monthly payments get bigger. Shorter terms are ideal for people with greater cash flow and a desire to pay off their homes quicker.

Not only do 15-year fixed mortgages have lower interest rates, but borrowers pay a lot less interest due to the abbreviated time frame for amortization.

10-Year Fixed

These very brief loans are for the borrowers who can afford higher monthly payments and want to pay off their homes quickly.

Ten-year loans have some of the lowest rates available. The shorter the loan term, the less cost in the big picture.

How to Calculate Fixed-Rate Mortgage Costs

When considering the types of mortgages available (and there is a handful), it’s helpful to understand amortization, which is the process of paying down debt through routine principal and interest payments. It’s a schedule dictating when the loan will be completely paid off.

During the early years of a loan’s life, monthly payments go primarily toward interest, but over time they are adjusted to pay down more principal instead. Amortization helps consumers understand costs.

To determine exactly what monthly mortgage payments they might have, borrowers should consult a useful online mortgage calculator unless they prefer to do the long-form math.

There are countless calculators on the Internet, but here is the formula for the math-minded:

Calculating Fixed-Rate Mortgages

M = Monthly payment P = Principal loan amount r = Monthly interest rate n = Number of months

In addition to paying principal and interest, borrowers must pay taxes and insurance premiums on their homes, but that’s usually lumped into the singular monthly payment, on top of solving for M.

Fixed-Rate Mortgage Example

Sometimes the best way to understand topics is through examples. Here are examples of a 15- and a 30-year term fixed-rate mortgage.

Mary and Sarah want to buy a $250,000 home, and they plan to put 20 percent or $50,000 down.

For illustrative purposes, we will leave out taxes and insurance costs, but online calculators usually include them based on zip code.

Fixed-Rate Mortgage Example

When comparing the actual numbers, how much more interest borrowers will pay with a longer loan length becomes very clear.

In this example, Mary and Sarah would be shelling out nearly an additional $60,000 more under a 30-year long term.

The converse is the monthly payment for the 30-year fixed is over $450 less than the 15-year fixed. These kinds of financial questions must be duly considered before a loan contract is signed.

What Are the Advantages of Fixed-Rate Mortgages?

  • Low, predictable payments.Budgeting is made easy with a permanent interest rate since payments remain the same unless taxes or insurance is adjusted. Borrowers are protected from interest rate hikes in the future.
  • Simplicity. Fixed-rate mortgages tout a simplified loan process that varies little from bank to bank. Additionally, their features are overall easier to understand compared to their counterparts.
  • Larger loan = larger house. Since borrowers can take advantage of low monthly payments, they can likely afford more house for their budget. They should keep in mind that a pricier house probably has more expensive upkeep and higher property taxes.

What Are the Disadvantages of Fixed-Rate Mortgages?

  • Higher interest rates.Historically, fixed-rate mortgages have higher rates than what adjustable-rate mortgages advertise. Ironically, as this is written in 2021, ARM and fixed mortgage rates are remarkably similar. If rates decrease overall, the only way to take advantage of it with a fixed-rate mortgage is by refinancing, which often has numerous associated fees.
  • More interest paid. Glance at the graph above one more time to be reminded of how much the difference in total interest paid varies between terms. Without exception, homeowners will pay much more interest with a 30-year fixed-rate loan than with a shorter-term or different type of mortgage altogether.
  • Higher requirements. Compared to FHA, USDA, and VA home loans, the requirements to qualify for fixed-rate mortgages are higher. Borrowers usually need a FICO credit score of 620 or higher, with the addition of a 20 percent down payment, assuming they want to avoid private mortgage insurance. Don’t worry, most applicants put down less.
  • Slow equity growth. Homeowners grow their equity very slowly because of the way 30-year fixed-rate loans amortize. After paying 10 years of their mortgage, borrowers have more equity in their home under a 15-year loan than in a 30-year loan. This can mess up future plans if families wrongly assume the amount of equity they have.

>> More:Differences Between Fixed-Rate and Adjustable-Rate Mortgages

Are Fixed-Rate Mortgages a Smart Financial Move?

There is a reason fixed-rate mortgages are the most common type of home loan. They provide consistency for families’ budgets and make a smart choice if rates are low.

People staying in their long-term home benefit from a fixed-rate mortgage as opposed to something that can adjust from time to time. As always, financial decisions are unique to everyone, and it pays to get expert advice.

Bottom Line: What is a Fixed-Rate Mortgage?

Fixed-rate mortgages offer security in the constantly changing world. A majority of individuals and families agree to pay more money over time for peace of mind in the now.

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Samantha Cathey
Samantha Cathey

Samantha Cathey is a Senior Personal Finance Writer & Product Analyst with years of financial training and industry knowledge. She is a former banker, loan officer and investment advisor before dedicating her energy to helping individuals more creatively, through her writing. Samantha studied at the University of Idaho where she majored in Journalism and Writing. Her areas of expertise are mortgages, credit cards, loans, and investing.