A fixed rate mortgage is a home loan with an interest rate that is set when the loan is taken out and does not change for the entire loan term, which in markets such as the United States commonly runs 15, 20 or 30 years. Because the rate never changes, the monthly principal-and-interest payment calculated at the start of the loan also never changes, giving the borrower the same housing payment for the life of the mortgage even though property taxes and insurance, if collected through an escrow account, can still move the total monthly bill up or down.
This is the most common type of residential mortgage in several major housing markets, particularly the United States, where long fixed rate terms are widely available partly because of government-sponsored entities that buy and guarantee this type of loan, making it easier for lenders to offer a long-term fixed rate without taking on all of the interest rate risk themselves.
Fixed rate mortgage in plain terms
A fixed rate mortgage works like a long-term lease on an apartment where the rent is locked in for the entire lease, no matter what happens to rents elsewhere in the city. If market rents rise sharply, the fixed rate tenant is protected and keeps paying the old, lower amount. If market rents fall instead, the fixed rate tenant does not benefit automatically and keeps paying the same amount as before, unless they choose to break the lease and sign a new one, which for a mortgage means refinancing.
Fixed versus adjustable rate mortgages
The main alternative is an adjustable-rate mortgage, which typically starts with a lower rate than a comparable fixed rate mortgage but can rise or fall over time as its reference rate moves. A borrower choosing between the two is essentially choosing between payment certainty and a potentially lower starting cost, and the right choice depends heavily on how long the borrower expects to keep the loan and their tolerance for payment uncertainty if rates rise. Borrowers who expect to move or refinance well before any rate adjustment would take effect sometimes choose a lower introductory rate deliberately, accepting the uncertainty in exchange for lower payments during the period they actually expect to hold the loan.
How amortization works inside a fixed rate mortgage
Even though the payment amount is fixed, the mix of principal and interest inside each payment shifts over the loan's term through amortization: early payments are weighted heavily toward interest, and later payments are weighted heavily toward principal, following a predetermined amortization schedule calculated at the time the loan is originated.
Refinancing a fixed rate mortgage
A borrower with a fixed rate mortgage can refinance into a new loan if market rates fall significantly below their existing rate, paying closing costs in exchange for a lower rate and payment going forward. Unlike an adjustable rate mortgage, a fixed rate loan will never adjust downward on its own, which is why refinancing, rather than waiting, is the only way a fixed rate borrower can capture the benefit of falling market rates.
Who tends to use a fixed rate mortgage
Fixed rate mortgages are particularly common among first-time buyers and households that plan to stay in a home for a long time, since the certainty of a fixed payment simplifies long-term budgeting and removes the risk of a payment shock years into the loan. They are also widely used by lenders themselves as the basis for mortgage-backed securities, because the fixed, predictable cash flow of a large pool of fixed rate mortgages is easier to price and sell to investors than a pool of loans with varying, unpredictable payment amounts. In many markets, government-sponsored entities play a significant role in buying and guaranteeing fixed rate mortgages precisely to keep this long-term product widely available and competitively priced for ordinary borrowers. A buyer comparing a fixed rate mortgage against an adjustable one should also weigh the loan-to-value ratio required by each program, since minimum down payment and insurance requirements can differ even when the two loans are otherwise similar in size and term.