Fixed-Rate Mortgage

Fixed-Rate Mortgage Defined

A fixed-rate mortgage (FRM) is a type of mortgage loan in which the interest rate remains unchanged for the entire life of the loan. The consistency of the interest rate prevents the fluctuations in monthly payments that may occur with an adjustable-rate mortgage (ARM). Fixed-rate mortgages are typically offered in terms of 10, 15, 20, or 30 years.

Examples

30-Year Fixed-Rate Mortgage: John secures a 30-year fixed-rate mortgage with an interest rate of 3.75%. This means his interest rate will remain at 3.75% for the entire 30 years, resulting in stable and predictable monthly payments.
15-Year Fixed-Rate Mortgage: Mary opts for a 15-year fixed-rate mortgage with an interest rate of 2.95%. This interest rate remains constant through the term, allowing her to pay off her home faster and pay less interest overall compared to a 30-year term.

Frequently Asked Questions

What are the benefits of a fixed-rate mortgage?

The key benefits include predictable monthly payments, protection from rising interest rates, and easier budgeting due to payment stability.

Are there any downsides to a fixed-rate mortgage?

Potential downsides include higher initial interest rates compared to ARMs and less flexibility if market interest rates decline significantly after the loan is taken out.

Can I switch from an adjustable-rate mortgage to a fixed-rate mortgage?

Yes, homeowners can refinance their existing adjustable-rate mortgage into a fixed-rate mortgage, generally depending on the terms of their original loan agreement and current market conditions.

What is a “due-on-sale clause”?

A due-on-sale clause is a provision in a loan agreement that requires the borrower to pay off the remaining balance of the mortgage when the property is sold.

What credit scores are needed to qualify for a fixed-rate mortgage?

Lenders typically look for a good credit score (generally 620 or higher) but qualifying criteria can vary significantly from one lender to another.

Adjustable-Rate Mortgage (ARM): A type of mortgage with an interest rate that can change periodically based on an index or benchmark.
Amortization: The process of gradually repaying a mortgage loan through regular payments of both principal and interest.
Interest Rate: The percentage of the loan amount that a lender charges to borrow the money.
Due-on-Sale Clause: A stipulation in a mortgage contract that requires the borrower to pay off the full remaining balance when the property is sold.
Refinancing: The process of obtaining a new mortgage to replace an existing one, often to benefit from a lower interest rate or shorter loan term.

Online Resources

References

Investopedia. (n.d.). Fixed-Rate Mortgage. Retrieved from Investopedia
Federal Reserve Board. (n.d.). Understanding Mortgage Loans. Retrieved from Federal Reserve Board
Consumer Financial Protection Bureau. (n.d.). Explore Interest Rates. Retrieved from CFPB

Suggested Books for Further Study

Mortgage Management for Dummies by Eric Tyson and Robert S. Griswold - Offers practical tips and strategies for managing mortgages.
The Mortgage Encyclopedia by Jack Guttentag - Comprehensive guide to all types of mortgages, terms, and the process.
The Complete Guide to Your Own Home by Robert Irwin - Detailed explanation of owning and financing your home.
Home Buying for Dummies by Eric Tyson and Ray Brown - A practical guide to the home buying process, including securing a mortgage.

Real Estate Basics: Fixed-Rate Mortgage Fundamentals Quiz

### What is a fixed-rate mortgage? - [ ] A home loan with an interest rate that changes periodically. - [x] A home loan with an interest rate that remains constant. - [ ] A loan that can only be adjusted by the lender annually. - [ ] A mortgage affected by the stock market fluctuations. > **Explanation:** A fixed-rate mortgage has an interest rate that does not change for the life of the loan. ### Which of the following is a primary benefit of a fixed-rate mortgage? - [x] Predictable monthly payments - [ ] Lower initial interest rates compared to ARMs - [ ] Ability to adjust payments annually - [ ] Early repayment without penalties > **Explanation:** Predictable monthly payments are a key benefit because the interest rate remains constant. ### What type of mortgage generally has higher initial interest rates? - [x] Fixed-rate mortgage - [ ] Adjustable-rate mortgage - [ ] Balloon mortgage - [ ] Interest-only mortgage > **Explanation:** Fixed-rate mortgages often have higher initial interest rates compared to adjustable-rate mortgages. ### What does the "fixed" in fixed-rate mortgage refer to? - [ ] Fixed tax assessments - [x] Fixed interest rate - [ ] Fixed property value - [ ] Fixed monthly insurance premiums > **Explanation:** The "fixed" refers to the fixed interest rate, which does not vary over the loan term. ### What term lengths are commonly available for fixed-rate mortgages? - [x] 10, 15, 20, or 30 years - [ ] 5, 15, or 25 years - [ ] 1, 5, or 10 years - [ ] 13, 18, or 25 years > **Explanation:** Fixed-rate mortgages are typically offered in terms of 10, 15, 20, or 30 years. ### What financial benefit does an FRM provide to a homeowner? - [x] Protection from rising interest rates - [ ] Lower initial loan costs - [ ] Flexibility with payment amounts - [ ] Ability to adjust the loan balance annually > **Explanation:** An FRM provides protection from rising interest rates, ensuring the homeowner's payments remain predictable. ### Who might benefit most from a 15-year fixed-rate mortgage? - [x] Someone wanting to pay off their home quickly and save on interest - [ ] Someone looking for the lowest possible monthly payment - [ ] A person who plans to move within a few years - [ ] Someone expecting unpredictable income > **Explanation:** A 15-year FRM is beneficial for someone who wants to pay off their home faster and reduce overall interest paid. ### Can a fixed-rate mortgage interest rate ever change during the loan term without refinancing? - [ ] Yes, every five years - [ ] Yes, once throughout the term - [x] No, it remains the same unless refinanced - [ ] Yes, if the lender allows it > **Explanation:** The interest rate on a fixed-rate mortgage remains constant unless refinanced into a new loan. ### What financial tool might a homeowner use to switch from an ARM to a fixed-rate mortgage? - [ ] Down payment - [ ] Home equity loan - [x] Refinancing - [ ] Reverse mortgage > **Explanation:** Refinancing allows a homeowner to switch from an adjustable-rate mortgage to a fixed-rate mortgage. ### During what economic conditions might a fixed-rate mortgage be more advantageous than an ARM? - [ ] When home equity is high - [x] When interest rates are low - [ ] When moving frequently - [ ] When mortgage insurance is required > **Explanation:** When interest rates are low, locking in a fixed rate can be advantageous to take advantage of predictable payments over time.

Fixed-Rate Mortgage