Fixed-rate mortgage
Updated
What is fixed-rate mortgage?
A fixed-rate mortgage keeps the same interest rate and the same principal-and-interest payment for the entire term.
Fixed-rate mortgage questions
- What is a fixed-rate mortgage?
- A mortgage whose interest rate is set at closing and does not change for the life of the loan. The principal-and-interest payment is therefore identical every month, from the first payment through to the last.
- What does a fixed rate actually fix?
- The interest rate, and with it the principal-and-interest payment. It does not fix your total housing payment: property taxes, homeowners insurance and HOA dues move independently and can rise a long way over thirty years.
- Is a fixed-rate mortgage better than an adjustable-rate one?
- Neither is better in the abstract. A fixed rate costs more at the outset in return for removing rate risk; an adjustable rate is cheaper until it resets. How long you expect to hold the loan is what settles it.
What it means in practice
Predictability is the product. Your P&I never changes, though your total payment can still move as taxes and insurance change.
Fixed rates normally start higher than adjustable rates, which is the price of transferring rate risk to the lender.
A fixed rate below current market pricing is a real asset. Preserving it is the argument for a second lien or a recast instead of a refinance.