Fixed-rate mortgage: What is it, types, how it works

Quick insights

• Fixed-rate mortgages provide stable monthly payments since the interest rate remains the same for the entire loan term.
• There are various fixed-rate options, such as conventional, government-backed, 30-year, 15-year and conforming, among others.
• Fixed-rate mortgages offer predictable monthly payments, but they may come with higher interest costs over time compared to adjustable-rate options.

When buying a home, the right type of mortgage is another one of the most important choices you’ll make. A fixed-rate mortgage is a popular choice because of the long-term stability and predictable monthly payments. With this type of loan, your interest rate remains the same throughout the entire loan term, allowing you to budget with confidence. Whether you’re purchasing your first home or refinancing, understanding how a fixed-rate mortgage works can help you decide if it’s the right option for you.

What is a fixed-rate mortgage?

A fixed-rate mortgage is a home loan with an interest rate that remains constant for the entire term of the loan. This means your monthly principal and interest payment will not change, regardless of shifts in the market or economy. Fixed-rate mortgages are ideal for borrowers who value consistency and want to avoid surprises in their monthly payment.

The interest rate you receive will depend on factors like your credit score, loan amount, lender and more. Usually, fixed-rate mortgages have loan terms of 15 or 30 years but can vary depending on the terms agreed upon by the loan provider and borrower. You can find current mortgage rates by location on our website.

How a fixed-rate mortgage works

Depending on the term and other factors, your mortgage provider sets the interest rate when approving a fixed-rate mortgage. The interest rate stays the same throughout the life of your loan, whether it’s a 15 or 30-year term. Each monthly mortgage payment will primarily go toward the loan principal and interest.

The stability of a fixed-rate mortgage makes it a popular loan option for homeowners planning to stay in their homes long-term. Keep in mind that property taxes and homeowners insurance may fluctuate, potentially impacting your total monthly payment.

Types of fixed-rate mortgages

Fixed-rate mortgages come in different types, each suited to various financial needs and homeownership goals. Here are some common options:

• Conventional fixed-rate mortgage: Not insured by the government, typically requiring higher credit scores and down payments.
• Government-backed fixed-rate mortgage: Includes FHA, VA and USDA loans. These loans often offer more flexible requirements and lower down payments. Please note that Chase does not offer USDA loans.
• Conforming fixed-rate mortgage: Meets loan limits set by Fannie Mae and Freddie Mac, potentially making it easier to qualify for competitive rates.
• 30-year fixed-rate mortgage: Offers lower monthly payments by spreading out the loan over 30 years, though a significant amount of interest is paid over time.
• 15-year fixed rate mortgage: Has higher monthly payments but helps borrowers save on interest and build equity faster.

Pros and cons of fixed-rate mortgages

The pros and cons of a fixed-rate mortgage can help you determine if it aligns with your financial goals and long-term homeownership plans. Let's start with the potential advantages.

Pros

• Predictable monthly payments: Your principal and interest payments remain the same throughout the loan term.
• Protection from interest rate increases: Even if the market interest rate rises, your fixed rate will not change, protecting you from higher monthly payments.
• Fairly simple to understand: Fixed-rate mortgages are usually straightforward, with no surprises or complicated terms.
• Long-term stability: If you plan to stay in your home for several years, a fixed-rate mortgage provides financial consistency.

Cons

• Higher initial interest rates: Fixed-rate mortgages can often start with higher interest rates compared to adjustable-rate mortgages (ARMs).
• Less flexibility: If interest rates drop significantly, you would need to refinance to take advantage of lower rates, which may involve closing costs.
• Higher long-term costs: Over the life of the loan, you may end up paying more interest compared to an adjustable mortgage if rates stay low.
• May not be ideal for short-term homeowners: If you only plan to stay in your home for a few years, you may miss out on the potential savings an adjustable-rate mortgage could offer.

How to calculate fixed-rate mortgage costs

To calculate the cost of a fixed-rate mortgage, consider factors such as the loan amount, loan term and interest rate. These elements determine your monthly principal and interest payment. Additionally, other expenses like property taxes, homeowners insurance and possibly private mortgage insurance (PMI) can affect your total monthly cost.

An online mortgage calculator can provide a clear estimate of your monthly payment by factoring in loan details, term, taxes and insurance. It can also show how extra payments can shorten your loan term and reduce interest costs.

In summary

Fixed-rate mortgages can provide consistent monthly payments, making it easier to budget long-term. They may work nicely for homeowners who value predictability and plan to stay in their home for many years. The interest rate affects the total cost of a mortgage, but it’s not the only factor. To explore loan options that fit your financial goals, speak with a Home Lending Advisor for personalized guidance.