All About Fixed Rate Mortgages: Meaning, Terms, and Payments

By Ciprian Morariu Published: March 6, 2024

Mortgage Loan Originator

Are you planning to buy a home and considering the option to finance the purchase? 

If yes, then it is important to be aware of the different options available to choose from, especially if you are a first-time home buyer. 

There are primarily two mortgage options, one is the fixed mortgage and the other is the adjustable-rate mortgage. 

Fixed mortgage is the most common mortgage term and you will likely come across it a lot during your financing journey. 

Getting a mortgage loan is a big decision and most likely the biggest financial commitment you will ever make. Thus, it is important to understand how common mortgage types work to make an informed decision. 

In this article, we will take a deep dive into understanding fixed-rate mortgages by covering everything from their meaning to how they work and what makes them different from adjustable mortgages.

Not all mortgages are equal and choosing one can be confusing for home buyers. So, how do you choose the right one?  

The best answer to this question is to work with an individual who has gone through an MLO license course and presently holds a mortgage loan originator license. An aspiring MLO typically prefers the online mortgage loan originator course as it allows him/her to study at own pace and convenience. 

Get in touch with an MLO to know which type of mortgage would precisely match your needs. 

How Does A Fixed Rate Mortgage Work?

Definition and Explanation

What is a fixed-rate mortgage? 

It refers to a loan where the interest rate is the same during the tenure of the loan regardless of how long or short it is. This is preferred in the real estate industry as the monthly payments remain the same throughout the loan period.  

For example - say that you are taking a home loan for 10 years at a 4% interest rate. With a fixed-rate mortgage, you will be paying the same amount of principal and interest rate for a total duration of 10 years. 

A fixed-rate mortgage is often pre-determined and finalized before finalizing the interest rate. There are several factors used for locking the rate upfront, such as - your credit score, the credit amount of the loan, the value of the home, credit history, income, and the amount of the down payment. 

Due to their inherent sense of financial security, fixed-rate mortgages are preferred by both homeowners and buyers, especially in a volatile and unpredictable housing market. 

Let us take a detailed look at the advantages and disadvantages of fixed-rate mortgages and whether they align with your goals.  

Advantages and Disadvantages

The most important advantage of choosing a fixed-rate mortgage for your property purchase is the predictability and peace of mind. 

A monthly fixed-rate mortgage payment is paid to the lender regardless of changing market interest rates. You also have the flexibility to choose between a short or an extended loan tenure.   

Choosing between a fixed versus a variable rate mortgage is an important decision and it requires a thorough understanding of the market, your circumstances, and the pros and cons. 

Let’s take a look at some of the advantages of fixed-rate mortgages below: 

  • The interest rate does not change during the entire duration of the loan
  • Easier for homeowners to understand and comprehend as a low-risk choice
  • Provides protection from financial inflation and changing interest rates
  • Opting for a fixed-rate mortgage is a smart way to set up a simple, clear-cut payment

Now that we know the advantages of opting for a fixed-rate mortgage, let us also look at some of the potential disadvantages: 

  • Qualifying for a mortgage loan is slightly difficult compared to an adjustable-rate mortgage
  • Fixed-rate mortgages are seen to have comparatively high interest rates. 
  • Monthly payments are generally stretched for a longer period
  • You might miss out on potential savings if the market interest rates remain low 

Next, let us learn more about fixed-rate mortgages and how they work. 

How Fixed Rate Mortgages Work

In a fixed-rate mortgage, your payments will not change as long as you are paying for your mortgage, even if the interest rates increase. 

Listed below is a step-by-step process of how a fixed-rate mortgage works: 

  • You decide to opt for a mortgage loan and choose a mortgage loan provider to apply. 
  • You convey your decision to opt for a fixed-rate mortgage to the loan provider.
  • You follow the qualification process to be eligible for a fixed-rate mortgage loan. 
  • Once you are qualified, you wait for approval from your loan provider. 
  • You decide the duration or tenure of your loan, which typically varies between 15 to 30 years. 
  • After you have finalized your loan duration, you decide on the monthly payment amount. 

Typically, a fixed-rate mortgage levies an interest rate based on various factors such as the current market rate of interest, property valuation, loan term, loan amount, and credit score. 

After you have finalized the loan payment terms and conditions, you will be required to pay for a fixed payment scheduled every month. 

Out of the total payment you make every month, some of it will go to a loan principal and the remainder will go to suffice the principal amount of your mortgage. 

If in the event you make an extra payment compared to what is required every month, the extra amount will be paid towards covering the principal amount of your loan. 

A mortgage loan calculator can help you identify 

The Most Common Mortgage Term

Overview of Mortgage Terms (15-year, 20-year, 30-year)

As you are on your journey to complete a big purchase in your life, then it is important to understand the different mortgage terms. 

Fixed-rate mortgages, as the name suggests, are governed by certain laws and regulations. There are structures of the different mortgage terms and they vary by different mortgage terms. 

The most common mortgage term is either 15 years or 30 years, though, 10 and 20-year mortgage terms are not a rarity either.  

The preference for a 30-year term is most common among borrowers as the monthly payments are quite low.  

Compared to a 15-year-old mortgage payment option, a 30-year-old mortgage option is more suitable for most home buyers as their willingness to pay increases more. 

Factors Influencing the Choice of Mortgage Term

Generally, home mortgage interest rates vary as per the term of the loan amount i.e. duration of the schedule, total loan amount, location of the property, and credit history of the borrower among others. 

In addition to the above, there are additional factors at play which might affect the type of mortgage and the interest rates: 

  • Inflation: One of the most critical factors, inflation can determine whether a financial lender or borrower wants to increase or reduce the interest rates. Typically, when inflation is high, consumers are more likely to borrow more, leading to increased interest rates. Take the following example - if the interest rate is 2% and the mortgage interest rate is set at 5%, then the bank gets 3% as the real return on their investment. 
  • Market conditions: Every financial institution and bank is determined by the conditions of the bond and equity markets. Typically, banks ensure that the net yield available from mortgage-backed securities is higher to attract homebuyers. Then comes the conditions of the housing market where the interest rates are determined by the demand (or lack thereof) from homebuyers. 
  • Rate of economic growth: When the economy is strong, buyers tend to participate more in the market by increasing their spending. A strong economic outlook also reflects higher wages for buyers, resulting in increasing demand for property. This propels mortgage rates to increase and interest rates to go up. 

A monthly fixed-rate mortgage payment is determined by a mix of all the above-described factors taken into account by the bank and financial institution. 

Understanding the Meaning of Fixed Rate Mortgages

Definition of Fixed Rate Mortgage

Fixed-rate mortgage meaning is a type of credit or loan offered by a lender to a borrower on a fixed interest rate. The interest rate is mutually agreed to before signing the loan or mortgage contract between the lender and the borrower and remains the same during the loan tenure.  

Historically, fixed-rate mortgages were introduced in the early 1930s to protect borrowers from uncertain market conditions and volatile market circumstances. 

Key Features and Benefits

The most important feature of a fixed-rate mortgage loan is also its most important benefit for both lenders and borrowers. 

As the name suggests, a fixed interest rate mortgage ensures that the rate of interest, hence the monthly payment amount, remains constant throughout the loan. 

This offers a higher sense of predictability and security, as compared to variable interest rate mortgage loans. 

Further, with a fixed-rate mortgage loan, borrowers and homebuyers have a simple and clear idea about their recurring monthly mortgage payments.

Another important benefit of a fixed-rate mortgage is that it is a low-risk choice for both lenders and borrowers due to the protection it offers against increasing interest rates.

Comparison with Adjustable Rate Mortgages (ARMs)

The most important differentiating factor between the two is how the interest rates and consequently, the recurring mortgage repayment is calculated. 

Adjustable-rate mortgages offer changing interest rates, which might go higher or lower, based on various factors such as - economic outlook, bond markets, and demand for housing among others. 

Initially, during the tenure of a mortgage loan, adjustable-rate mortgages offer a lower interest rate than a fixed-rate mortgage loan. However, they do not offer a level of predictability and security due to their volatile nature.