What Is A Fixed Rate?

What is a fixed rate? A fixed rate loan is a loan where the interest rate stays the same for the entire life of the loan. A fixed-rate mortgage is the most common type of mortgage loan, and it allows homeowners...

A fixed-rate mortgage is the most common type of mortgage loan, and it allows homeowners to lock in the same interest rate for the entire life of the loan. These types of mortgages are the least complicated-and least risky products on the market because they are very straightforward. Homeowners know upfront what the interest rate will be for the entire duration of the loan, and the monthly payments will not change (unless taxes and/or insurance are included in your mortgage, which may go up or down at any given time). Richard Fryer, a real estate school president with 30 years of experience, goes on to explain that these loans are "also...known as a level annuity amortize mortgage which means the mortgage payment principal and interest don't change for the [term of the loan]. The principal and interest will be the same."

Fixed rate loans are available for various repayment terms, 15-year, 20-year, and 30-year mortgages being the most common. The 15-year fixed rate mortgage offers the lowest interest rate of most other fixed mortgage products, and allows homeowners to build up equity in their home in a considerably short period of time. Since the loan is for a short period of time, you will also be saving money in interest as well. However, you should keep in mind that the monthly mortgage payment will usually be significantly higher for a 15-year mortgage, since you have less time to pay the loan off. The 20-year loan gives you a little more time to pay the house off, so your monthly payments will be a little lower, and you still save a lot of money in interest. The 30-year fixed rate mortgage is the most common fixed rate mortgage on the market and it is also the easiest to qualify for. Since you can stretch the mortgage over a larger period of time, you can get the lowest monthly payment possible. While your interest rate will be higher, this type of loan provides the maximum interest tax deduction.

While they are not as common as the 15, 20, or 30-year loans, there are also balloon fixed rate mortgages available on the market as well. Balloon loans typically come in 5, 7 and 10-year varieties and allow for shorter term financing. After the end of the 5, 7, or 10-year term, the loan either needs to be refinanced of paid off in full for the entire outstanding about, also referred to as a "balloon payment". These loans are typically for people who are either extremely confident that they will be able to refinance, move, sell the property or make the balloon payment at the end of the term.

Typically, the benefits of having a fixed rate is having stable monthly payments and being able to lock in a firm interest rate (this is a definite plus if you are getting a low rate and there's a chance of interest rates going up again). This loan is also ideal for people who are living on a limited of fixed income.

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