What is a fixed-rate mortgage and how does it work?

Fixed-rate mortgages are the most common home financing option, representing more than 90% of mortgages, according to an analysis from the Federal Reserve Bank of St. Louis. You could choose a fixed rate for FHA, USDA, VA, or conventional loans, meaning your monthly principal and interest payment won’t change throughout your loan. While it makes your payment easy to budget for, you could miss out if rates drop unless you refinance. 

Learn how to qualify for a fixed-rate mortgage, as well as what to consider before you decide on a fixed interest rate.

What is a fixed-rate mortgage? 

The rate on a fixed-rate mortgage remains the same for the life of the loan. You can usually opt for a fixed rate with common types of mortgages, such as conventional, USDA, FHA and VA loans. While other factors — such as rising property taxes and home insurance costs — can influence what you pay each month, your interest rate won’t change as the years go by. Because of this, fixed-rate mortgages are more predictable.

How does a fixed-rate mortgage work?

As with any mortgage, homebuyers who choose a fixed-rate mortgage make payments once a month until the loan matures. A portion of the total monthly payment goes toward the loan principal, interest, property taxes, and home insurance. 

The interest rate on a fixed-rate mortgage won’t change over time. Whatever rate you receive at closing is the rate you will have until your loan matures and is paid off. 

Markets may shift and rates may change, but the interest rate with a fixed-rate mortgage will remain the same across all monthly payments, which is something to keep in mind when deciding when to buy a home. A lower interest rate typically means lower monthly payments and less interest paid over the entire mortgage term.

Types of fixed-rate mortgages 

With a fixed-rate mortgage, the term you choose can affect the rate you receive from your lender. In many cases, the lender might offer you a lower interest rate with a shorter-term loan. You’ll have a higher monthly payment if you choose a 15- or 20-year term over 30 years, but your interest rate should be lower and you’ll save on interest over the life of the loan. 

For example, the table below shows how much you might pay on a $250,000 home loan if you have slightly lower rates for shorter loan terms: 

Fixed-rate mortgage vs. adjustable-rate mortgage 

There are two different types of interest rate options homebuyers may choose when taking out a loan: a fixed-rate mortgage vs. an adjustable-rate mortgage (ARM). 

A fixed-rate mortgage has an interest rate that doesn’t change for the life of the loan. If you receive a 6.89% interest rate at closing on a 30-year mortgage, the initial interest rate you pay will be the same at the end of the loan repayment. Your monthly payment could change because of other variables, such as homeowners insurance and property taxes.

On the other hand, the interest rate for adjustable-rate mortgages changes with market conditions. Adjustable-rate mortgages often have a lower interest rate initially. 

Borrowers who choose adjustable-rate mortgages have a period where the lower rate is locked in. After that time, the rate adjusts to match market conditions and changes every six to 12 months. 

There are a variety of different types of ARMs on the market, such as:

• 5/6 ARM: Fixed interest rate for five years, then the rate adjusts every six months until the loan matures
• 7/1 ARM: Fixed interest rate for seven years, then the rate adjusts once a year until the loan matures

ARMs may be a good option if you only plan on staying in the home for a few years. Buyers who plan to live in their home for a long period of time may choose a fixed-rate mortgage so their housing payment will be predictable. 

Pros and cons of a fixed-rate mortgage 

Before you decide whether a fixed-rate mortgage is right for you, here are some pros and cons to consider:

How to qualify for a fixed-rate mortgage 

To qualify for a fixed-rate mortgage, new borrowers need to show that they are financially stable and likely to repay a loan. To improve their odds of being approved, first-time homebuyers should consider doing the following:

• Paying down debts: Many lenders only allow homebuyers to use 28% of their gross monthly income on housing costs. The maximum debt-to-income ratio (DTI) they allow is often 36%. Try paying down your debts before you start house hunting.
• Making a large down payment: Regardless of which type of loan you choose, a larger down payment can help you receive a lower rate. If you are having trouble saving up for a down payment, consider looking into first-time homebuyer down payment assistance.
• Maintaining steady employment: Frequently switching jobs can make it challenging for your lender to determine whether to grant you a loan. If you’re strongly weighing switching jobs, try staying in the same industry or hold off until you’ve closed on your home, if possible. 
• Raising credit scores: Your credit score will improve by paying down your debts, but there are other steps you can take that may help. For example, check your credit reports for errors and dispute any you find. You can request reports from TransUnion, Experian, and Equifax, or you can get a free copy of your report from AnnualCreditReport.com. If you find an error, begin the formal dispute process as soon as possible.
• Submitting paperwork: If your loan officer needs additional documents before approving you for a loan, make sure to submit them as quickly as possible.

Fixed-rate mortgage FAQ 

Can I refinance a fixed-rate mortgage?

If rates drop or your financial situation improves, you can refinance your fixed-rate loan. Refinancing replaces your existing mortgage with a new home loan, interest rate and term. The minimum amount of time you need to wait to refinance after closing is six months. You'll still be required to pay closing costs when you refinance, typically 2% to 6% of the loan amount, so make sure the new interest rate and terms will make it worthwhile. 

How does my credit score affect my mortgage rate?

Credit scores are used to determine how likely a borrower is to repay the loan. Statistically, buyers with lower credit scores are more likely to have missed payments or gone into default. Homebuyers with higher scores generally receive better rates than borrowers with lower credit scores. 

Are there any fees associated with fixed-rate mortgages?

There aren’t any major fees you have to consider when deciding between a fixed-rate mortgage and an adjustable-rate mortgage. However, depending on the lender, you may have to pay a rate-lock fee. A rate lock lets you keep a particular interest rate for a set period of time while you’re finding a house and completing the closing process.