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NORTHSTAR MORTGAGE
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a home loan option with a specific interest rate for the entire term of the loan. Essentially, the interest rate on the mortgage will not change over the lifetime of the loan and the borrower's interest and principal payments will remain the same each month.
With this type of mortgage, even fluctuations in the market will not have an impact on the rate. Because of this, these types of home loans are the most popular mortgages in the U.S.
How does a Fixed-Rate Mortgage Work?
When it comes to fixed-rate mortgages, the name says it all. When you get one of these mortgages, your interest rate will remain the same for the entire time you’re paying off the loan. In other words, the interest rate is fixed.
How long are Fixed-Rate Mortgage terms?
30-Year Fixed: 30-year fixed-rate mortgages are the most popular option for borrowers. Because the loan term is long, you can keep your monthly payments nice and low, even with a slightly higher interest rate (although there are rare exceptions, the longer mortgage term you chose, the slightly higher rate you’ll get). Though borrowers can save money on interest by going with a short-term mortgage, 30-year loans often present the most affordable option for those who are more concerned about keeping their monthly housing costs down than the overall costs over the loan’s lifespan.
30-Year Fixed: 30-year fixed-rate mortgages are the most popular option for borrowers. Because the loan term is long, you can keep your monthly payments nice and low, even with a slightly higher interest rate (although there are rare exceptions, the longer mortgage term you chose, the slightly higher rate you’ll get). Though borrowers can save money on interest by going with a short-term mortgage, 30-year loans often present the most affordable option for those who are more concerned about keeping their monthly housing costs down than the overall costs over the loan’s lifespan.
If you’re considering a 30-year mortgage term, think about what’s more important: lower monthly payments, or paying off your loan faster and paying less in interest over the life of the loan? You can check this using our mortgage calculator.
If you’re considering a 30-year mortgage term, think about what’s more important: lower monthly payments, or paying off your loan faster and paying less in interest over the life of the loan? You can check this using our mortgage calculator.
15-Year Fixed: When you opt for a 15-year mortgage term, you’ll save quite a bit of money on interest compared with a 30-year term. Not only do 15-year loans typically have lower rates than 30-year loans, but because the loan has a shorter amortization period, you’ll save even more on interest. This holds true even if you were to have the same interest rate on both a 15-year loan and a 30-year loan. Let’s look at an example of this.
15-Year Fixed: When you opt for a 15-year mortgage term, you’ll save quite a bit of money on interest compared with a 30-year term. Not only do 15-year loans typically have lower rates than 30-year loans, but because the loan has a shorter amortization period, you’ll save even more on interest. This holds true even if you were to have the same interest rate on both a 15-year loan and a 30-year loan. Let’s look at an example of this.
Other Fixed-Rate Mortgage Terms: Depending on the lender, you may also find other fixed-rate loan terms that better fit your needs. Perhaps you’d like a loan that balances the affordability of a 30-year term with the interest-saving benefits of a 15-year loan. 20-year terms are a good example of this and are another popular option for borrowers, though not as commonly touted as the 15- or 30-year.
Other Fixed-Rate Mortgage Terms: Depending on the lender, you may also find other fixed-rate loan terms that better fit your needs. Perhaps you’d like a loan that balances the affordability of a 30-year term with the interest-saving benefits of a 15-year loan. 20-year terms are a good example of this and are another popular option for borrowers, though not as commonly touted as the 15- or 30-year.
What are the differences between Fixed-Rate and Adjustable-Rate Mortgages (ARMs)?
ARMs come with risk: You are assuming a risk with an ARM that interest rates will go up, and if that happens, you’ll pay more in interest every month. If you are applying for a mortgage at a time when interest rates are high, you might be making a good bet. If mortgage rates are low, however, you're probably better off with a fixed-rate mortgage.
ARMs are initially cheaper: Fixed-rate mortgages typically come with slightly higher rates than ARMs. However, once the lower introductory rate period on an ARM is over, your rate could increase, causing your monthly payments to go up. On the other hand, if rates go down when your ARM adjusts, you might end up saving even more with an ARM.
ARMs might make sense if you don’t plan to stay in the home long. An ARM’s low introductory rate can be very attractive, especially if you don’t plan on remaining in your home for a long time. Typically, your introductory rate remains fixed for the first 5, 7 or 10 years you have the loan. If you know you’ll be selling your house before your rate adjusts, you can save money by opting for an ARM. Plus, if interest rates are currently relatively high, an ARM can help you get a lower rate.
Benefits of Fixed-Rate Loan
Pro: Consistent Payments Make Budgeting Easy
Pro: Consistent Payments Make Budgeting Easy
The main benefit of a fixed-rate mortgage is that your monthly mortgage payment will remain the same throughout the life of the loan. With a fixed-rate mortgage, the amount you pay toward the mortgage itself, the part that’s made up of your principal and interest, won’t change.
There’s only one caveat: if your homeowners insurance premium or property taxes go up or down, your payments will change to reflect your new costs. Those factors are outside of your lender’s control, but your monthly mortgage payments will probably include these expenses. Your lender will hold those additional expenses in an escrow account and pay them for you when they come due. This makes your life easier and prevents a missed property tax or insurance payment that could become a huge headache.
Pro: Your Loan Fully Amortizes Over The Term Of The Mortgage
Pro: Your Loan Fully Amortizes Over The Term Of The Mortgage
As you learn about fixed-rate mortgages, you’ll also hear the term amortization. Mortgage loans typically have a set length of time that dictates when they’ll be paid off. For example, you may have a 30-year fixed-rate mortgage, which means that after 30 years of monthly payments, your mortgage will be fully paid off. Because your rate is fixed, you’ll know exactly how much interest you will pay for the life of your loan. And because the mortgage term is 30 years, you enjoy a low payment relative to the amount of your original mortgage.
Cons of Fixed-Rate Loan
Con: You’ll Pay A Little More Initially
Con: You’ll Pay A Little More Initially
Fixed-rate mortgages will have higher rates than the introductory rate you’ll get on an ARM (discussed below). You’re paying a bit more in exchange for the peace of mind that you’ll have a low rate locked in for the entire time you’re paying off the loan.
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