Fixed Rate Mortgages

Fixed rate mortgages are the most common type of mortgages offered to homebuyers. A fixed rate mortgage is one in which the interest rate does not change with market conditions. It is the opposite of an adjustable rate mortgage, or ARM, which does fluctuate based on market interest rates.

Fixed rate mortgages are offered to homebuyers with various terms. The most popular loan types are the 15 year mortgage, 20 year mortgage, and 30 year mortgage, all of which can come with fixed interest rates.
Of these three, a fixed rate mortgage is likely to have the lowest interest rate on a 15 year loan amortization because the loan has a shorter duration, thus carrying less risk, and mortgage lenders are better able to predict interest rate changes over 15 years than they are 30 years.

Likewise, a 30 year mortgage will have the lowest monthly payment since the cost of the home are spread over 360 payments, but will have the highest interest rate. A 20 year loan is offered only by a few mortgage brokers, but it has become more popular as homebuyers look for methods through which they can finance a home inexpensively and also have reasonable monthly payments. In this regard, the 20 year mortgage works as a great intermediary between the two.

Appreciating a Fixed Rate
There are plenty of reasons why homeowners should seek out a fixed rate mortgage over other types of home mortgage loans. For one, a fixed rate mortgage has a known monthly payment, and a known monthly interest rate. Thus, homebuyers can know with confidence that they’re plenty capable to make the monthly payment on their mortgage, pending there is no decline in their earnings.

However, there is an implied cost in choosing a fixed rate mortgage, namely that rates on adjustable rate mortgages are usually lower by .5-1%, depending on the loan term. Adjustable rate mortgages are issued at lower rates because the borrower, not the lender, bears the cost of interest rate changes. If rates rise for borrowers with ARMs, the price of their monthly payment can rise by as much as 20-30% on a small 1% increase in rates.

Prepayment Penalties
Fixed rate loans are more likely to be written without prepayment penalties, which are fees charged to borrowers for paying a loan back early. Prepayment penalties aren’t just another way for banks to make money; instead, they’re put on adjustable rate mortgages so that the borrower doesn’t decide to seek out a refinance to swap to a fixed rate loan with a low annual rate. Fixed rate borrowers are significantly less likely to refinance, so prepayment fees are less common to the same degree.

If you have bad credit at the time you sign your loan, or expect to have better credit in the future, it would be wise to sign onto a fixed rate loan for this reason. Without a prepayment penalty, you’ll can refinance as you please, locking in a lower rate with each uptick in your credit. Of course, this assumes that rates stay relatively flat, but it is certain there will be opportunities to lock in lower; if not, there wouldn’t be any way for you to access lower rates, anyway.

Americans should appreciate the opportunity to secure a fixed rate loan for long-term mortgages. In Canada, fixed rate loans aren’t given past 10 years, and many other developed nations have the same legal structure. In the United States, the ability to borrow inexpensively for long periods of time is mostly afforded by the Federal Housing Authority, which securitizes loans made to individual borrowers so they can receive lower rates on their home loans.