Fixed-Rate Mortgage
Definition
A fixed-rate mortgage has an interest rate that remains constant for the entire term of the loan, resulting in equal monthly principal and interest payments throughout the life of the mortgage.
Example
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.
Exam Tip
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 Financing Terms
Conventional Loan
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.
FHA Loan
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.
VA Loan
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.
Adjustable-Rate Mortgage (ARM)
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.
Loan-to-Value Ratio (LTV)
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.
Debt-to-Income Ratio (DTI)
The debt-to-income ratio (DTI) compares a borrower's monthly debt obligations to their gross monthly income. It is used by lenders to determine how much mortgage a borrower can afford.
Frequently Asked Questions
Test Your Financing Knowledge
Practice with exam-style questions to make sure you can apply Fixed-Rate Mortgage and other financing concepts.