Source: The Mortgage Reports —
What is a fixed-rate mortgage?
In mortgage terms, a fixed rate means the interest rate remains the same for the life of your home loan — keeping your monthly principal and interest payment consistent.
The rate on a fixed mortgage is locked upfront. And, unlike an adjustable-rate mortgage (ARM), your rate can never go up. In an unstable interest rate market, fixed-rate mortgages give homeowners stable and predictable payments for the long haul.
How do fixed-rate mortgages work?
A fixed-rate mortgage or “FRM” works just like the name implies: your interest rate is set or “fixed” for the entire duration of the loan. That means your rate and monthly mortgage payment will never change (unless you decide to change them).
The most popular type of home loan is the 30-year fixed-rate mortgage. This type of loan is structured, or “amortized,” so that the loan will be paid in full by the end of its 30-year term.
Keep in mind that, although a 30-year FRM locks your rate for three decades, you’re not required to keep the loan or the rate that entire time. If interest rates drop, homeowners can often refinance into a lower rate and payment to save money.
Fixed-rate mortgage terms to know
Fixed-rate mortgages are comprised of three parts: principal, interest, and amortization. Knowing these three terms is key to understanding how a fixed home loan works.
Loan principal
Your loan amount or “mortgage principal” represents the amount you originally borrowed when you purchased your home. Mortgage principal is calculated by subtracting your down payment from the purchase price. If you paid $300,000 for your home with a down payment of 10% ($30,000), your principal balance would be $270,000. This is the amount you’ll pay off over time — with interest.
Interest rate
Interest is the second key component of your home loan. Interest is money paid to your lender in exchange for providing you with a mortgage; in other words, it’s the cost of borrowing.
Your interest rate helps determine your monthly mortgage payment as well as the total amount you’ll pay your lender over the life of the loan.
With a fixed-rate mortgage, your interest rate can never change unless you decide to change it (for example, by refinancing). That means your monthly payment will never change, either. This predictability is part of the reason most homeowners choose a fixed-rate loan over a variable-rate loan.
Amortization schedule
“Amortization” is a fancy term for the process of paying off your mortgage. Loan amortization describes the way in which your mortgage payments are spread out between principal and interest over time.
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