Fixed Rate Mortgages Explained

Fixed rate mortgages (FRMs) are the most traditional home mortgages and the most popular. However, they are inflexible, which can make them unsuitable for some people.

This page:

  • Explains how a fixed rate mortgage works

  • Describes the differences between the two FRM types: 15-year and 30-year

  • Helps you decide whether an FRM is right for you.

Later in this section we'll examine adjustable rate mortgages (ARMs) and sub prime mortgages for those with "problem credit".

The second part of this Mortgage Basics Guide describes what goes into your mortgage package such as points, insurance, etc.

Should you choose a fixed mortgage rate?

The interest rate on a fixed rate mortgage is decided entirely at the time of the initial funding, no matter what interest rates do after closing.

It doesn't really matter what index rate the lender uses on an FRM because the rate will never change. All you need to worry about is the rate you're quoted.

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Our guide to choosing the right mortgage goes even more in-depth into the various mortgage choices. After you get acquainted with the basics here, we recommend that you check out that section for a look at the various strategies involved when choosing between fixed and adjustable mortgage rates.

The biggest choice FRM buyers will face is the length of the mortgage term. Lenders typically offer 15-year and 30-year FRMs, and both have their pros and cons. Let's take a closer look:

  • 15-year FRM. This plan amortizes your mortgage over the course of only 15 years, so you build home equity very quickly and pay relatively little in total interest. However, the monthly payments are quite a bit steeper than they would be on a 30-year plan, so it can restrict how much you can spend on your house. The total amount of interest you will pay on a 15-year FRM is a fraction of what it is for almost any other mortgage.

  • 30-year FRM. This is the most popular mortgage. Interest payments are amortized over 30 years, so the monthly payments are significantly lower than they are for a 15-year plan, but the total amount of interest paid over the life of the loan is much higher. It is usually possible to get approval for a higher mortgage amount on a 30-year plan because lenders consider the monthly payments so much more manageable.

Equity is built much more slowly with a 30-year loan, but tax deductions are larger because of the high interest bills. Your total interest bill on a 30-year loan will be thousands more than on a 15-year loan for the same amount. However, if you invest the difference in your monthly payments, the money can be easily recouped.

Fixed rate mortgages are very popular because of their predictability. Although the monthly payments may vary slightly because of taxes and insurance, the basic payment is the same throughout the life of the mortgage. If interest rates are low at the time you apply for your mortgage and you plan on living in your home indefinitely, an FRM is ideal. You'll have low monthly payments for the life of your mortgage.

In summary, FRMs are great especially if interest rates are low and you're not planning on moving anytime soon. However, if interest rates fall, you may be stuck with high monthly payments that you can adjust only by refinancing the whole mortgage, which can be a costly process. Likewise, if you end up moving again soon (and restarting the process), an adjustable rate mortgage will probably save you money because of its low initial rate

Next: An in-depth look at adjustable rate mortgages (ARMs)

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