Fixed-Rate Mortgage

How Fixed-Rate Mortgages Work

With a fixed-rate mortgage, the interest rate is locked in at closing and does not change for the life of the loan. The monthly principal and interest payment is calculated using a standard amortization formula based on the loan amount, rate, and term. While the total payment amount stays the same, the proportion allocated to interest versus principal shifts over time, with more going to principal as the balance decreases.

Common Fixed-Rate Terms

The two most common fixed-rate mortgage terms are:

• 30-year fixed: the most popular option, offering the lowest monthly payment but the highest total interest cost over the life of the loan
• 15-year fixed: higher monthly payments but significantly lower total interest cost and faster equity accumulation

Some lenders also offer 10-year, 20-year, and 25-year fixed terms. On a $350,000 loan, the difference in total interest between a 30-year and 15-year term at the same rate can exceed , though the monthly payment on a 15-year term is substantially higher.

When a Fixed Rate Makes Sense

Fixed-rate mortgages are generally preferred by borrowers who plan to stay in the home long-term, want payment predictability, or believe interest rates may rise. In rising-rate environments, locking in a fixed rate protects borrowers from increasing costs. The trade-off is that fixed rates are typically higher than the initial rate on an adjustable-rate mortgage (ARM). Borrowers in a falling-rate environment can refinance to capture a lower rate, though refinancing involves closing costs that must be weighed against the savings.