What is a Fixed Rate Mortgage?
A fixed rate mortgage (FRM) is a fully amortizing mortgage loan which is when the interest rate remains the same over the entire term of the loan. This differs from adjustable rate mortgages (ARMs), as ARM interest rates are fixed for a specified number of years and adjust during the life of the loan thereafter. Because the interest rate is fixed for the duration of a FRM, the monthly payments do not change for the life of the loan.
Fixed mortgages can have terms of 30, 20, 15 or 10 years. A 30-year fixed rate mortgage is the most common mortgage program in the U.S., as it offers predictability and stability for a housing budget.
How does a fixed interest rate mortgage work?
The term is the number of years you repay the loan. For example, a 30-year fixed rate loan is paid back over the course of 30 years. When you pay a loan back over a longer time period, you pay more interest over the life of the loan. While 30-year fixed rate loans are attractive because of the steady rate, you pay more interest at a higher rate than you would for an ARM.
Choosing the right loan term for your fixed rate mortgage depends on your financial situation. A shorter term such as a 15-year fixed usually has lower interest rates, which allows you to pay less interest over the life of a loan compared to a 30-year fixed rate mortgage. One drawback of a 15-year fixed rate loan, compared to those with longer terms, is that the monthly payments are higher because the loan principal is paid back over fewer years.