If you like predictability, a fixed-rate loan might be for you.
If you’re applying for a mortgage (or are thinking about it), you’ll likely encounter a bunch of new terms. One of the first decisions you may make is whether or not to pursue a fixed-rate mortgage. Before you decide, make sure you know exactly what that means—and what a fixed-rate mortgage could mean for your home buying process.
A fixed-rate mortgage is one where your interest remains the same for the entirety of the life of the loan. This is different from an adjustable-rate mortgage, where the interest rate changes over time.
They’re the most predictable.
A fixed-rate mortgage is the most common home loan buyers get. Fixed-rate mortgages are amortized, meaning the principal, interest, and other costs are broken down into a series of set, even payments. This makes them preferable for budget-conscious consumers looking to make a steady, affordable payment each month.
Your payment can still change.
The term “fixed” only applies to the interest in fixed-rate mortgages, so homeowners are often surprised to learn that their mortgage payment can still change. The amount due each month can go up or down based on changes to property taxes, insurance premiums, or other home-buying costs, like homeowner association fees.
You can choose different terms, or loan timelines.
Fixed-rate mortgages come with different timelines, or terms. The most common mortgage terms are 30 years and 15 years. The 30-year loan is a popular option because the monthly payment is lower— after all, the principal is spread out over three decades. But the 15-year mortgage has its advantages, too. Not only will the loan be paid off more quickly, but you’ll also pay interest for half as long, meaning the total cost of the loan is often lower than that for a 30-year loan.
A fixed-rate mortgage isn’t the only option.
Sometimes a home buyer opts to take out an adjustable-rate mortgage. This means the interest rate changes over time, after an initial time period. Home buyers who know they’ll sell their home or pay off the loan before the end of that initial period may benefit from a low initial interest rate, but for those staying in their homes long-term, the unpredictability of these loans can make them less desirable.