When you have a fixed-rate mortgage, the amount you pay toward the principal and interest portion of the loan won’t change. There is only one catch: your payments will adjust to reflect your new expenditures if your home insurance premium or property taxes increase or decrease.
What Is a Fixed-Rate Mortgage
An interest rate that stays the same for the duration of a loan is known as a fixed-rate mortgage. The lender charges you interest as compensation for lending you the money. The main of the loan, which is the sum you borrowed, is also covered by the monthly payment.
Real estate taxes, homeowners insurance, or mortgage insurance may all be included in your monthly mortgage payment. Only if these costs rise will your payment increase.
Conventional loans and loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs are examples of fixed-rate mortgages.
- You need to be familiar with the following mortgage loan definitions to comprehend a fixed-rate loan:
- The amount borrowed—the amount you borrow.
- Annual percentage: the annual percentage rate you pay on loans. Generally, rates range from 2.86% to 3.40%, depending on the loan length.
- Term. the duration of your loan.
- Amortization. The timetable that underlies your payments. This is typically the same as the length of your loan, but if you have a balloon mortgage that calls for a one-time fee after the term, it might be longer.
- Payment routine. How frequently do you pay—generally once each month?
- Payment sum. Several other variables, including the loan amount, rate, term, amortization, and annual payment, determine the required monthly or quarterly fee.
How Fixed-Rate Mortgage Operates
Many mortgage products are on the market, but they may be divided into two primary groups: variable-rate loans and fixed-rate loans. The loan interest rate with variable speeds is set above a predetermined benchmark. Then it fluctuates, which means that it varies periodically.
The interest rate for fixed-rate mortgages remains constant for the whole loan term. Fixed-rate mortgages don’t change with the market, unlike variable- and adjustable-rate mortgages. Therefore, regardless of whether interest rates are rising or falling, the interest rate on a fixed-rate mortgage remains the same.
Most home buyers who want to stay in their homes for a long time choose to lock in their interest rate with a fixed-rate mortgage. These mortgage products are more predictable, which is why they are preferred. In other words, there are no surprises because borrowers are aware of their monthly payment obligations.
The mortgage term is how long you will have to make payments on the loan or how long it will last. Fixed-rate mortgage periods in the US can be anything from 10 and 30 years; the typical increments are 10, 15, 20, and 30 years. The most popular term option is 30 years, followed by 15 years.
Types of Fixed-Rate Mortgage
1. Mortgages with a 2-year fixed rate
When you have a two-year fixed-rate mortgage, your interest rate is set for that time. This is likely the shortest period for your mortgage interest rate to be locked because 1-year fixed-rate agreements are less frequent. Your monthly payments won’t vary with this type of agreement during the two years, regardless of whether interest rates increase or decrease.
Two-year deals are sometimes regarded as having the lowest fixed rates accessible since interest rates on shorter-term fixed-rate agreements are typically lower than those on long-term fixed-rate mortgages. They are probably appropriate for borrowers who require temporary budgetary assurance.
2. Mortgages with a three-year fixed rate
In a three-year fixed-rate mortgage, both the interest rate and your monthly payments are set for the duration of the loan. Unlike a variable mortgage, you can budget confidently because your prices are fixed for the next three years.
If you want to keep your monthly expenses to a minimum, this mortgage may appeal to you because it might be less expensive than five or 10-year arrangements. Rates for a 3-year contract are probably higher than those for 2-year mortgages.
The mortgage will often return to the lender’s regular variable rate (SVR) once the three-year fixed rate mortgage period is over, as with other fixed rate arrangements, so borrowers might wish to start shopping around for a better offer a few months before their fixed term is over.
3. Mortgages with a 5-year fixed rate
A mortgage with a fixed rate for five years is known as a 5-year fixed-rate mortgage. No matter what happens to interest rates throughout the five-year fixed-rate period, you can rest easy knowing your monthly payments won’t fluctuate.
Rates for 5-year fixed packages are often slightly higher than those for shorter-term fixed-rate mortgages because they give homeowners more time to plan their budgets.
When calculating the total cost of any agreement, it’s crucial to consider arrangement costs because the best 5-year fixed-rate mortgages could have higher ones.
Check to see if any offer you’re considering signing up for is transferable, meaning it may be transferred to a new property if you intend to move within the five-year fixed-rate mortgage period.
4. Mortgages with a 10-year fixed rate
No matter what happens to external interest rates during that time, a 10-year fixed-rate mortgage has an interest rate and monthly payments set for ten years.
Ten-year mortgages typically cost a little more than arrangements with terms of two, three, or five years, but you’ll know that your payments will stay the same for a more extended period. Therefore, they may be appropriate for individuals with a limited budget and need assurance that their mortgage payments will stay stable for the next ten years.
How much flexibility you will likely require over the next ten years will determine your ideal 10-year mortgage agreement.
If you move during the policy time, you can transfer your arrangement to a new property because certain 10-year fixed mortgages are portable. However, you will need to reapply for a mortgage, and your lender will run fresh affordability checks in addition to valuing your new house.
What transpires After your Mortgage’s Fixed Rate Term is Up?
You will often switch to the lender’s standard variable rate (SVR) at the end of the fixed rate period when that time expires. As a result of the fact that this is often greater than the fixed rate you were paying, you can prefer to lock in another fixed rate agreement when your existing mortgage rate expires. The SVR is unique to each mortgage lender and is subject to vary at any time and in any amount.
If you are currently obligated to another mortgage, it is still possible to acquire a new contract. Suppose you begin the application process before your existing deal expires. In that case, you can jump from one deal to another because many mortgage offers are valid for several months after the day they are provided.
Advantages of Fixed-rate Mortgage
- The fixed-rate mortgage has the benefit of having a consistent monthly payment. It is simpler to prepare your budget because of this predictability. In contrast to an adjustable-rate mortgage, you won’t need to be concerned about potential payment increases.
- Each month, a portion of the principal is paid off. Your home equity is immediately increased as a result. Only if your real estate taxes—which you pay through your monthly mortgage payment—increase or if the cost of your homeowner’s insurance does as well.
- To pay off your principal faster, you can increase your payments. Pre-payment penalties are typically absent from fixed-rate loans. If interest rates rise over the next several years, this loan can also be an excellent option. That’s because, unless you decide to refinance, your rate is fixed and won’t alter.
Disadvantages of a Fixed-rate Mortgage
- The drawback of a fixed-rate mortgage is that it could have a higher interest rate than an interest-only or adjustable-rate loan. If interest rates stay the same or decrease in the future, it becomes more expensive.
- Another drawback is that principal repayment is slower than with an adjustable-rate loan. The initial years’ contributions are mainly used to pay interest. These are, therefore, bad if you intend to sell your home in the next five to ten years.
- Additionally, you might need help being approved for fixed-rate loans, and your closing fees can be higher than for an adjustable-rate loan. Both of these are due to the possibility of financial loss for banks should interest rates increase.
- They are taking a significant risk by agreeing to a 30-year loan because banks want to be compensated for that risk. An adjustable-rate mortgage can be better if you want to relocate in five years or less.
Frequently Asked Questions
When should I use a fixed-rate mortgage?
Your best choice may be a fixed-rate loan if:
- To guarantee a low-interest rate
- You want to learn how much interest you will accrue during the loan’s term.
- Later on, you want to avoid being concerned about refinancing.
However, obtaining a fixed-rate loan is only sometimes possible. You might only be able to get a fixed-rate mortgage if you have good credit or can afford a little down payment. Consider considering a different kind of mortgage if a fixed-rate mortgage is not an option, or you can get a loan with a higher interest rate.
For how long may the interest rate be fixed?
You can lock in your mortgage rate for 1, 2, 3, 5, 7, 10, or 15 years, though the one-year and 15-year fixes are rare.
The interest rate will typically increase the longer your fixed-rate period lasts.
This is because it is more difficult for a lender to forecast what will happen in the market over a longer length of time. As a result, you are essentially paying for the assurance that your rate won’t increase regardless of what happens.
Which mortgage term—two or five years—should you choose?
Most fixed-rate mortgages are two- or five-year contracts, respectively.
The most freedom is available with two-year fixes. The best candidates for them are borrowers who wish to actively manage their mortgages and frequently swap deals or those who are thinking about moving soon.
Five-year agreements secure your mortgage rate for an extended period but cost a little extra. It can be tempting to lock in a low rate for five years, but you should consider if you want to sign a contract for that long.
How do fixed-rate mortgages function?
You can maintain the same interest rate for several years with a fixed-rate mortgage. It implies that you’ll be well aware of how much you contribute to your mortgage each month.
The interest rates on other mortgages, such as tracker or variable rate mortgages, fluctuate monthly.
A fixed-rate gives you greater control over your monthly expenditure than other types of mortgage because there won’t be any unpleasant shocks on your mortgage statement.
In conclusion, a fixed-rate mortgage locks in the interest rate and your monthly payment for a predetermined amount of time, typically two, three, five, or ten years. First-time buyers frequently choose a fixed-rate mortgage because it makes managing their monthly finances easier.