Fixed-rate mortgages provide payment stability because the borrower knows exactly what the payment will be each month. The most common terms are 30-year and 15-year. A 15-year mortgage has higher monthly payments but saves significantly on total interest. In the early years of a fixed-rate mortgage, most of the payment goes toward interest; in the later years, most goes toward principal. This is called amortization.
A borrower obtains a 30-year fixed-rate mortgage at 6.5% for $300,000. The monthly principal and interest payment is approximately $1,896 and will remain the same for all 360 payments. The total interest paid over 30 years would be approximately $382,560.
Fixed-rate mortgages are the most common loan type and frequently tested. Remember that even though the payment stays the same, the portion going to interest vs. principal changes each month (amortization). Compare with ARM where the rate and payment can change.
Related Terms
Related Concepts
A conventional loan is a mortgage that is not insured or guaranteed by a government agency such as the FHA, VA, or USDA. It is originated and funded by private lenders and may be conforming or non-conforming.
An FHA loan is a mortgage insured by the Federal Housing Administration that allows lower down payments and credit scores than conventional loans. It is designed to help first-time homebuyers and borrowers with limited resources.
A VA loan is a mortgage guaranteed by the Department of Veterans Affairs available to eligible veterans, active-duty service members, and surviving spouses. It offers no down payment and no private mortgage insurance requirements.
An adjustable-rate mortgage (ARM) has an interest rate that changes periodically based on market conditions, typically after an initial fixed-rate period. The rate adjustment is tied to a financial index plus a margin.
The loan-to-value ratio (LTV) is the percentage of a property's appraised value or purchase price (whichever is lower) that is being financed through a mortgage. LTV = Loan Amount / Property Value.
Frequently Asked Questions
Study This in Your State
Fixed-Rate Mortgage may have state-specific rules. Choose your state to study Financing with localized content: