A fixed rate mortgage is just what it sounds like: a mortgage with an interest rate set by your credit score and income that does not change over the course of the mortgage. The epitome of stability, you pay the same amount every month; the only variation lies in how much of it is going toward paying off interest, and how much is paying off the principle. The most common form of fixed rate mortgages is the 30-year mortgage, although 15 and 20-year mortgages that feature higher monthly payments but lower overall payments are not uncommon.
Elements of a Fixed Rate
Term Length: the time it takes to pay off your mortgage in full, 30 years for most fixed term mortgages;
Principle: the listed house price when you bought the house. Must be paid off in full by the end of the term length of the mortgage, which should happen if you follow the payment schedule;
Interest Rate: set at a constant rate (averaging around 5-8% for the last decade) over the length of the mortgage.
Example
Take for example, a mortgage for $200,000 with a 6% interest rate for 30 years. The table below reflects the allocation of the payments to the principle and interest, also known as the amortization schedule, over a three-month period.
Month
Payment
Principle
Interest
Principle Balance
1
$1,199.10
$199.10
$1,000.00
$199,800.90
2
$1,199.10
$200.10
$999.00
$199,600.80
3
$1,199.10
$201.10
$998.00
$199,399.70
Some traits to note here:
The payment for each month is exactly the same, but the proportion paid to principle and interest varies.
Initially, a large amount of your payment will be dedicated towards paying off interest, but as time goes on, a larger share will be dedicated to paying off the principle.
Pros of a Fixed Rate Mortgage
Simplicity: no need to worry about much besides a constant monthly payment.
Stability: making a constant payment each month helps significantly with your budgeting. The recent bursting of the housing bubble illustrates the importance of stability, as other kinds of mortgages (such as Adjustable Rate Mortgages) often contain payment hikes that have historically caught homeowners unaware, and led to an inability to make the monthly payments.
Cons of a Fixed Rate Mortgage
Refinance Fees: if you have a fixed rate mortgage, the only way to take advantage of falling mortgage interest rates is to refinance, which comes with more fees.
Early Troubles: If you have a very limited income in the first few years, but expect a much higher income in later years (after, say, grad school), you may struggle to meet your payments for the first few years.
Select the Fixed Rate Mortgage if:
You prefer stable monthly payments for your mortgage, with very few nasty surprises.
You are on a tight budget that cannot withstand the shock of interest rates adjusting upwards, thereby raising your monthly payments.
You plan on staying in the house for an extended period of time.
Elements of a Fixed Rate
budgeting. The recent bursting of the housing bubble illustrates the importance of stability, as other kinds of mortgages (such as Adjustable Rate Mortgages) often contain payment hikes that have historically caught homeowners unaware, and led to an inability to make the monthly payments.