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Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

Ask Our Home Buying Expert

Have a question? Ask our Home Buying expert.

Have questions? Email Send your question to mlerner@smartasset.com

Fixed-Rate Mortgages

Buying a house is often an exciting milestone. With so many decisions to make, though, it can also be quite stressful. Figuring out whether to go with a fixed- or an adjustable-rate mortgage is a key element of the process. Before you settle on either option, it helps to know as much as possible about the fixed-rate mortgage loan.

Check out our mortgage calculator.

What Is a Fixed-Rate Mortgage?

The fixed-rate mortgage is the kind of home loan that’s free of surprises. Once you’re approved for a mortgage, the interest rate that you agree to is set in stone. You’ll know exactly how much you’ll be paying and your rates won’t change or jump from one month to the next.

That’s simple enough, right? Of course, you can’t talk about a fixed-rate mortgage without understanding how its counterpart works. On the flip side, adjustable-rate mortgages (which are also referred to as variable-rate or floating-rate mortgages) have fluctuating interest rates.

While you might start out paying very little interest as a new homeowner, over time you could be handing over a much higher amount of money each month if your interest rate increases. Adjustable-rate mortgages generally come with low introductory interest rates and a period in which that rate stays fixed. After that initial period of, say, five years, your interest rate is subject to change (up to a certain limit).

If rates on fixed-rate mortgages seem too high for you, perhaps a loan with an adjustable interest rate would be a better fit. The interest rate under an adjustable-rate mortgage could be lower than it would be with a fixed-rate mortgage loan, at least in the beginning. Or, if interest rates go down (unlikely these days but it’s happened in the past), holders of variable-rate mortgages stand to gain.

Overall, the interest rate you’re eligible for depends on multiple factors: the location of your home, the amount of your down payment, the length of your loan term, your credit score as well as what’s happening in the housing market and with overall interest rates.

Other components that come into play include the sale price of your home, the size of your loan and whether your loan is a jumbo loan or a mortgage from the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA).

Find out now: How much mortgage can I afford?

When to Sign Up for a Fixed-Rate Mortgage

Fixed-Rate Mortgages

Although they’re the most popular type of home loan, fixed-rate mortgages only work for certain people. If you’re a first-time homebuyer and all of the mortgage terms sound like jibberish to you, a fixed-rate mortgage is generally the easier, more straightforward way to go.

Homeowners who don’t plan on moving for a while might also want to consider getting a fixed-rate mortgage to avoid an unexpected rise in interest rates in the future. But if you’re more of a nomad and you intend to jump ship and move somewhere else within a few years, a variable-rate loan could allow you to temporarily lock in lower rates.

A fixed-rate mortgage may be best for you if you prefer to have a set budget and you need to know ahead of time how much to set aside for your mortgage payments. In the event that there’s an emergency or you’re laid off from your job, at least the rates on your home loan won’t go up.

Related Article: How to Decide Between Fixed Rate and Variable Rate Mortgages

The Difference Between a 15- and 30-Year Fixed Loan

Fixed-Interest Rates

Fixed-rate mortgages typically have 15- or 30-year terms. As soon as you know that the fixed-rate mortgage is the loan you want, you still have another question to answer: Should I pick a 15- or 30-year loan? That decision will be based on how much you’re willing to contribute to payments each month and the interest rate level you can afford.

A 30-year loan might be better if you’d rather have lower monthly payments and you don’t mind paying more interest. If the interest rate bothers you, at least the mortgage interest deduction will help you feel better when tax time rolls around. And if you’re serious about showing your debt who’s boss, paying more than you’re required to could put you on a faster track to a debt-free existence. That’s why it’s a good idea to go with a loan that doesn’t include prepayment penalties.

With a 15-year fixed-rate loan, you can count on having a higher mortgage bill because of the shorter loan term. You’re giving yourself less time to pay off the same amount of debt. However, you’ll typically be able to enjoy a lower interest rate than you would under a 30-year loan and you can build more equity in less time. Your home equity tells you the ownership stake you have in your home. Subtracting what you owe on your mortgage from your house’s market value gets you your home equity.

The Takeaway 

Fixed-rate mortgage loans are perfect for people who work around a budget and don’t want to run the risk of having to pay more interest in July than they did in January. Still, they’re probably not ideal for homeowners who plan to relocate and sell their home in a short time period – like during the introductory period of an adjustable-rate loan before their interest rate changes. Whichever loan you choose, remember that your mortgage doesn’t have to be forever. If conditions are right you can always refinance.

Photo credit: ©iStock.com/BartekSzewczyk, ©iStock.com/Xavier Arnau, ©iStock.com/laflor

Amanda Dixon Amanda Dixon is a personal finance writer and editor with an expertise in taxes and banking. She studied journalism and sociology at the University of Georgia. Her work has been featured in Business Insider, AOL, Bankrate, The Huffington Post, Fox Business News, Mashable and CBS News. Born and raised in metro Atlanta, Amanda currently lives in Brooklyn.
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