• A fixed-rate mortgage is a home loan in which the interest rate remains constant through the term of the loan (until the loan is repaid or refinanced), which helps your principal and interest payments remain steady long-term. 
  • Compared to adjustable-rate mortgages (ARMs), in which the rate fluctuates at predetermined intervals based on market conditions, fixed-rate mortgages offer improved predictability and simplify long-term budgeting by removing market interest rate changes from the equation.   
  • Fixed-rate mortgages are well-suited to buyers looking to “lock in” today’s rates for the long term (with the potential to refinance in the future if rates decline). 

When purchasing a home, selecting the right mortgage financing is essential. Your home loan choices affect the required down payment, monthly mortgage payments, and the total interest you’ll pay over the course of the loan.

This article will explain what fixed-rate mortgages are and how they work. We’ll also discuss the pros and cons of fixed-rate mortgages to help you decide if this is a fitting home loan solution for you. 

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a home loan in which the interest rate remains the same throughout the term of the loan.[1]

The interest rate is the cost of borrowing money. The higher the interest rate, the higher your mortgage payment could be, and the more you’ll pay in total interest expense over the life of the loan.

When interest rates are low, a fixed-rate mortgage can “lock in” the favorable rate for the entire loan, allowing you to keep that rate, even if market rates increase over time.  

For example, if you agree to a 15-year home loan with a fixed 6.95% interest rate, the rate remains 6.95% until the loan is repaid or refinanced. 

What Is Refinancing and When Does It Make Sense?

Mortgage refinancing is when a homeowner replaces their existing home loan with a new loan, under new terms. This is commonly done when a homeowner can secure a lower interest rate by refinancing (due to lower market rates or improved credit scores that qualify the borrower for a lower rate). 

Importantly, you must qualify for refinancing based on criteria such as credit score, income, and home value. There are also costs associated with refinancing, so you would need to run the numbers to determine if refinancing is worth the expense.  

Fixed-Rate Mortgages vs. Adjustable-Rate Mortgages

With fixed-rate mortgages, the interest rate on your home loan does not change unless you take deliberate action to refinance the loan. With an adjustable-rate mortgage, on the other hand, the rate fluctuates at predetermined intervals to account for changing economic conditions (after an introductory period, which may offer a favorable fixed rate for several years).[2]

Homebuyers may choose ARMs over fixed-rate mortgages when they believe current rates are high and will fall over time. Since ARM rates fluctuate, falling rates may be reflected in lower mortgage payments without any refinance required from the borrower. Other buyers choose an ARM when they plan to sell the home within the 5-7 year introductory period (as is often the case with starter homes). And some borrowers strategically choose ARMs with the intention of refinancing to a fixed-rate mortgage if rates fall in the future. However, there is a risk that rates will not fall or the borrower will not qualify for a refinance in the future, so borrowers should not enter an ARM unless they are comfortable seeing it through the end of the loan term. 

How Does a Fixed-Rate Mortgage Work?

Fixed-rate mortgages are comparatively simple:

  • You borrow a specific amount with a set repayment period. For example, a qualified borrower might receive a $400,000 loan to be repaid over 30 years. 
  • The interest rate is locked in. Once your loan is originated, the interest rate does not change, regardless of market fluctuations, for the life of the loan. 
  • Your monthly principal and interest payments remain constant. The total of principal plus interest remains the same every month during your loan term. However, your total mortgage payment can change due to changes in property taxes and homeowners’ insurance premiums.  
  • Principal and interest payments are applied according to the amortization schedule. In the early years of the loan, a larger portion of your payment goes toward interest, while later in the loan term, more of your payment is applied to paying down the principal balance.

During the mortgage application process, you may be able to secure a rate lock, which locks in the rate for a set period (30, 45, or 60 days) to protect against market fluctuations while your loan is being finalized.

How Are Interest Rates Calculated?

The interest rate offered by a mortgage lender may fluctuate (until locked in) based on a number of factors, including the following:[3]

Market Conditions

Mortgage rates are influenced by fiscal policy and financial markets, such as:

  • Federal Reserve policies. The Fed doesn’t directly set mortgage rates, but its adjustments to the federal funds rate affect banks' borrowing costs, which in turn affect mortgage rates.
  • The bond market. Fixed mortgage rates often change with the 10-year Treasury yield. When yields rise, mortgage rates typically increase, and vice versa.

Borrower-Specific Factors

Mortgage interest rates are tailored to individual borrowers based on a variety of factors reflected in their credit profiles, including:

  • Credit scores. Borrowers with higher credit scores may qualify for lower rates because a higher score indicates less risk of defaulting on a debt.
  • Loan-to-value ratios (LTV). LTV is the ratio of the amount financed as a percentage of the property’s current value. A higher down payment reduces the LTV, which may result in a lower rate since it reduces lender risk.
  • Debt-to-income ratios (DTI). DTI is the ratio of your monthly debt obligations compared to your monthly income. A lower DTI indicates more manageable levels of debt, representing a lower risk of default.

Loan-Specific Factors

  • Loan type. Different mortgage types offer different interest rates. For example, jumbo loans (which exceed conforming loan limits) typically have higher rates, while government-backed loans (like FHA, VA, and USDA loans) may offer lower rates.
  • Loan term. A 30-year fixed-rate mortgage may have a higher interest rate than a 15-year mortgage because it carries more long-term risk for the lender.[1]
  • Discount points. You can buy down the interest rate by purchasing mortgage discount points upfront, reducing the rate for the life of the loan.

Pros and Cons of Fixed-Rate Mortgages

Advantages of Fixed-Rate Mortgages 

The benefits of fixed-rate mortgages include:

  • Predictable monthly payments. Long-term household budgeting is easier because your principal and interest total does not change.
  • Protection against market rate increases. Your interest rate will not increase, even if market rates do.
  • Certainty regarding the total cost of the loan. Because the rate does not change, you can calculate the total cost of the loan upfront, before committing to the loan.   

Potential Drawbacks of Fixed-Rate Mortgages

The possible downsides of fixed-rate mortgages include:

  • The rate may be higher than introductory ARM rates. ARMs typically offer lower introductory rates as an incentive to accept the risk of fluctuating rates.[2] So ARMs may be more appealing to buyers who don't plan to live in the home for a long period of time. 
  • Your rate will not automatically adjust if market rates fall. You would continue paying the higher rate you locked in unless you refinance. 
  • Refinancing comes with qualification requirements and costs. If you want to refinance to take advantage of lower future rates, you would need to qualify for the refinance and incur fees associated with the refinance. 

Is a Fixed-Rate Mortgage Right for You?

A fixed-rate mortgage may be the right solution for you if:

  • You plan to keep the home for 10 years or more.
  • You prefer the predictability of consistent mortgage payments. 
  • You are unsure about your ability to cover adjustable-rate mortgage payments if the ARM rates increase to their maximum limit. 

However, a fixed-rate mortgage might not be the right fit if:

  • You plan to sell the property within the next 10 years (particularly if you plan to sell before the lower introductory rate of an ARM expires). 
  • You expect interest rates to fall and want your mortgage to automatically reflect changing rates.

Get Pre-Approved for a Fixed-Rate Mortgage Today

Your path to homeownership begins with a mortgage pre-approval, in which a lender reviews your finances to assess your eligibility for a home loan and determine how much you can borrow. 

Pre-approval helps you establish a homebuying budget and shop within the right price range. Then, when you’re ready to make an offer on a home, your pre-approval letter demonstrates your financial qualifications to the seller. This may incentivize them to accept your offer, knowing you can secure the funding needed to complete the purchase. 

Learn more about the pre-approval process and begin your application today!