A fixed-rate mortgage is a type of home loan for which the interest rate is set when you take out the loan and it will not change during the term of the loan.
How are interest rates determined?
Interest is the cost of borrowing funds from a lending institution, and each borrower will pay a different rate. The interest rate that borrowers are charged is based on market levels for interest rates, as well as several other factors that will vary for the individual borrower.
Here are a few factors that can impact your rate:
Credit: Your credit has a significant impact on the rate that you’ll pay, because it indicates how likely you are to pay back the loan. Borrowers with high credit scores can expect lower mortgage interest rates.
Down Payment: Generally, the more money you put down on a home, the more you have to lose if you stop making your mortgage payments. This means you’re a less risky borrower, which typically earns you a lower interest rate.
Loan Product: There are many different loan categories and products, such as Conventional, VA, FHA, and USDA loans. Rates can be different depending on which loan you choose.
Loan Term: You have the ability to choose the length of your loan term. Typically, they are in 15- and 30-year terms. In general, shorter terms will have lower rates because the money is paid back quicker. While you will experience lower rates and pay less interest with a 15-year term, your monthly payments will still be larger.
Location: Interest rates can vary depending on the market’s health in your city or state.
Why are they popular?
Fixed-rate mortgages offer consistency and stability, giving homeowners more flexibility and peace of mind that they can continue to make their monthly payments, even if their budgets or incomes fluctuate over time.
Offers consistency and stability
Set interest rate throughout the loan term
Ideal for homeowners that plan to stay in their home long-term
Potentially higher rates than comparable adjustable-rate offerings
Can be more difficult to qualify
Principal is paid off at a slower rate
Must refinance to take advantage of falling interest rates