If you’re a first-time homebuyer or looking to refinance your current mortgage, you’ve probably come across the term “fixed-rate mortgage.” A fixed-rate mortgage is a popular type of home loan that offers stability and predictability. In this guide, we’ll take an in-depth look at fixed-rate mortgages, how they work, their benefits and drawbacks, and how to choose the right term for your needs.

What is a Fixed-Rate Mortgage?

A fixed-rate mortgage is a type of home loan that has an interest rate that remains the same for the life of the loan. This means that your monthly mortgage payments will also stay the same, making it easier to budget and plan for the future. Fixed-rate mortgages typically come in two term options: 15-year and 30-year loans.

How Does a Fixed-Rate Mortgage Work?

When you take out a fixed-rate mortgage, your lender sets the interest rate at the time of the loan origination. This interest rate remains constant for the entire loan term, regardless of changes in the broader economy or fluctuations in interest rates. This means that your monthly mortgage payments will also remain the same over the life of the loan, making it easier to budget and plan for the future.

Benefits of a Fixed-Rate Mortgage

There are several benefits to choosing a fixed-rate mortgage over other types of home loans.

Stability and Predictability

The most significant benefit of a fixed-rate mortgage is the stability and predictability it offers. With a fixed interest rate, your monthly mortgage payments will remain the same, making it easier to budget and plan for the future. This is especially beneficial for first-time homebuyers or those on a fixed income who need to know exactly how much they’ll be paying each month.

Protection Against Inflation

Another advantage of a fixed-rate mortgage is that it protects you against inflation. As inflation rises, the cost of living increases, but your mortgage payment remains the same. This means that your monthly housing cost will become relatively cheaper over time, giving you more financial flexibility.

Peace of Mind

A fixed-rate mortgage also offers peace of mind. Because your interest rate and monthly payment remain constant, you don’t have to worry about unexpected rate hikes or fluctuations in your monthly payment. This security can help you sleep better at night and reduce financial stress.

Drawbacks of a Fixed-Rate Mortgage

While there are many benefits to a fixed-rate mortgage, there are also some drawbacks to consider.

Higher Interest Rates

One of the primary drawbacks of a fixed-rate mortgage is that the interest rates are typically higher than those of adjustable-rate mortgages (ARMs). This means that you may end up paying more over the life of the loan, especially if you choose a longer term like a 30-year mortgage.

Limited Flexibility

Another disadvantage of a fixed-rate mortgage is that it offers limited flexibility. Because your interest rate and monthly payment are fixed, you can’t take advantage of falling interest rates without refinancing your loan. This can be time-consuming and costly, and you may not always qualify for a better rate.

Longer Loan Terms

Finally, fixed-rate mortgages typically come with longer loan terms, which means you’ll be paying off your mortgage for a more extended period. While this can make your monthly payments more affordable, it also means you’ll pay more in interest over the life of the loan.

Choosing the Right Fixed-Rate Mortgage Term

If you’ve decided that a fixed-rate mortgage is right for you, the next step is to choose the right term. Fixed-rate mortgages come in two term options: 15-year and 30-year loans. Here’s what you need to know about each term option.

15-Year Fixed-Rate Mortgage

A 15-year fixed-rate mortgage is a home loan with a term of 15 years and a fixed interest rate. This shorter term means that you’ll pay off your mortgage faster and pay less in interest over the life of the loan.

Benefits of a 15-Year Fixed-Rate Mortgage

• Lower interest rates: 15-year fixed-rate mortgages typically have lower interest rates than 30-year loans, which means you’ll save money on interest over the life of the loan.
• Faster equity buildup: Because you’re paying off your mortgage faster, you’ll build equity in your home more quickly. This can be beneficial if you’re looking to sell your home or take out a home equity loan in the future.

Drawbacks of a 15-Year Fixed-Rate Mortgage

• Higher monthly payments: Because you’re paying off your mortgage in a shorter time frame, your monthly payments will be higher than they would be with a 30-year loan. This can make it harder to budget and manage your monthly expenses.
• Limited financial flexibility: Because your monthly payments are higher, you may have less financial flexibility to handle unexpected expenses or emergencies.

30-Year Fixed-Rate Mortgage

A 30-year fixed-rate mortgage is a home loan with a term of 30 years and a fixed interest rate. This longer term means that you’ll have lower monthly payments but pay more in interest over the life of the loan.

Benefits of a 30-Year Fixed-Rate Mortgage

• Lower monthly payments: Because your mortgage is spread out over a longer term, your monthly payments will be lower than they would be with a 15-year loan. This can make it easier to budget and manage your monthly expenses.
• More financial flexibility: Because your monthly payments are lower, you’ll have more financial flexibility to handle unexpected expenses or emergencies.

Drawbacks of a 30-Year Fixed-Rate Mortgage

• Higher interest rates: 30-year fixed-rate mortgages typically have higher interest rates than 15-year loans, which means you’ll pay more in interest over the life of the loan.
• Slower equity buildup: Because you’re paying off your mortgage over a longer time frame, you’ll build equity in your home more slowly.

Other Fixed-Rate Mortgage Terms

In addition to 15-year and 30-year fixed-rate mortgages, there are other fixed-rate loan terms that may better fit your needs. For example, you may want a loan that balances the affordability of a 30-year term with the interest-saving benefits of a 15-year loan. A 20-year term is a good example of this and is another popular option for borrowers, though not as commonly touted as the 15- or 30-year.

Here’s the best part: you can actually pick your own fixed-rate term that meets your financial goals. Lenders offer fixed-rate mortgages with terms ranging from 8 – 30 years.

Conclusion

A fixed-rate mortgage is a popular type of home loan that offers stability and predictability. While there are benefits and drawbacks to choosing a fixed-rate mortgage, it’s important to choose the right term for your needs. Whether you opt for a 15-year, 30-year, or another fixed-rate mortgage term, be sure to consider your financial goals, budget, and other factors before making a decision.