What are fixed-rate mortgages? What’s the difference between fixed-rate and adjustable-rate? From Investopedia, here are some helpful answers to these tricky questions.
A fixed-rate mortgage charges a set rate of interest that remains unchanged throughout the life of the loan. Although the amount of principal and interest paid each month varies from payment to payment, the total payment remains the same, which makes budgeting easy for homeowners.
The partial amortization schedule below demonstrates the way in which the amounts put toward principal and interest alter over the life of the mortgage. In this example, the mortgage term is 30 years, the principal is $100,000, and the interest rate is 6%.
| Payment | Principal | Interest | Principal Balance |
| 1. $599.55 | $99.55 | $500.00 | $99900.45 |
| 2. $599.55 | $100.05 | $499.50 | $99800.40 |
| 3. $599.55 | $100.55 | $499.00 | $99699.85 |
As you can see, the payments made during the initial years of a mortgage consist primarily of interest payments.
The main advantage of a fixed-rate loan is that the borrower is protected from sudden and potentially significant increases in monthly mortgage payments if interest rates rise. Fixed-rate mortgages are easy to understand and vary little from lender to lender. The downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan is more difficult because the payments are less affordable. A mortgage calculator can show you the impact of different rates on your monthly payment.
Although the rate of interest is fixed, the total amount of interest you’ll pay depends on the mortgage term. Traditional lending institutions offer fixed-rate mortgages for a variety of terms, the most common of which are 30, 20, and 15 years.
The 30-year mortgage is the most popular choice because it offers the lowest monthly payment. However, the trade-off for that low payment is a significantly higher overall cost, because the extra decade, or more, in the term is devoted primarily to paying interest. The monthly payments for shorter-term mortgages are higher so that the principal is repaid in a shorter time frame. Also, shorter-term mortgages offer a lower interest rate, which allows for a larger amount of principal repaid with each mortgage payment. Thus, shorter term mortgages cost significantly less overall. (For more, see Understanding the Mortgage Payment Structure.)
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