Fixed-Rate Mortgages: What You Need To Know

As we’ve seen, mortgage rates can fluctuate quickly, and the market is ever-changing. Understanding how to navigate shopping for a fixed-rate mortgage and saving money has never been more important.

In this article, we will examine how a fixed-rate mortgage works, what loan term options are available, and if a fixed-rate mortgage is best suited for you.

What Is A Fixed-Rate Mortgage?

A fixed-rate mortgage is a housing loan alternative that offers a predetermined interest rate throughout the duration of the loan. Essentially, the interest rate on the mortgage remains constant over the loan lifespan, ensuring that the borrower's monthly payments for both principal and interest remain unchanged.

This type of mortgage is immune to market fluctuations, making it the preferred choice for home loans in the United States.

Utilizing data from Freddie Mac, the National Association of REALTORS^® (NAR) reported the following national averages with mortgage rates for the week ending November 22, 2023:

• 30-year fixed-rate mortgages: averaged 7.29%. A year ago, 30-year rates averaged 5.51%.
• 15-year fixed-rate mortgages: averaged 6.67%. A year ago, 15-year rates averaged 4.67%.

Fixed-Rate Mortgage Terms

A loan’s term refers to how long you’ll pay it off. The two most common mortgage loan terms on the market are 15-year and 30-year mortgages. They’re similar in many ways but also have some significant differences.

• 15-year fixed mortgage: 15-year fixed-rate mortgages typically come with lower interest rates compared to 30-year fixed-rate mortgages. Benefits include faster equity buildup and significant interest savings over the life of the loan, but the higher monthly payments may be less affordable for some borrowers.
• 30-year fixed mortgage: 30-year fixed-rate mortgages are the most common and popular choice for home buyers due to their more affordable monthly payments. While interest rates on 30-year fixed-rate mortgages may be slightly higher than those on 15-year loans, they provide greater flexibility and affordability for many borrowers.

While 15-year and 30-year mortgages are the two most popular fixed-rate mortgage types, they may not fit your financial situation. With Rocket Mortgage^® you can choose a fixed-rate term that meets your financial goals, with terms from 8 – 30 years.

Benefits Of Fixed-Rate Mortgages

There are several benefits that come with fixed-rate mortgages that make them attractive to many homeowners, especially to those who value stability, predictability, and financial security over everything else.

Consistent Payments

With a locked-in interest rate, you know exactly how much you need to pay each month throughout the loan term. This predictability allows you to better manage your household budget and avoid unexpected financial shocks due to fluctuating interest rates.

Locked In Interest Rate

One of the most significant advantages of a locked-in interest rate is protection against interest rate hikes. If interest rates rise after you've locked in your rate, you won't be affected, and your payments will remain the same. This can provide peace of mind during periods of economic uncertainty or rising inflation.

Potential Downsides Of Fixed-Rate Mortgages

It is important to note that fixed-rate mortgages are not suitable for all financial situations, especially if you are uncertain of future job changes, income fluctuations or other major life changes.

You’ll Pay More Initially

Fixed-rate mortgages often have higher initial interest rates than adjustable-rate mortgages (ARMs). This means your initial monthly payments on a fixed-rate mortgage may be higher than an ARM during its introductory fixed-rate period.

You’ll Have Less Flexibility

If market interest rates drop significantly after you've locked in your fixed-rate mortgage, you won't be able to benefit from lower rates without refinancing. Refinancing involves completing the application process again and paying associated fees, which could negate some of the benefits of a fixed-rate loan.

You’ll Build Equity Slowly

Due to amortization, when you first take out a mortgage, the majority of your monthly payment is applied toward interest. Only a small portion is applied to the principal. However, as you continue making regular payments, the balance gradually decreases, the equity in the home increases, and the proportion of the payment allocated to the principal increases. This process continues throughout the mortgage term until the loan is fully paid off.

While fixed-rate mortgages provide stability, predictability comes with a cost. Borrowers pay a premium for the interest rate guarantee throughout the loan term. This can result in paying more interest over the life of the loan than an ARM if interest rates remain relatively low.

Tips For Getting a Fixed Mortgage

Securing a fixed-rate mortgage involves careful preparation and consideration. Here are some tips to help you navigate the process and increase your chances of getting approved for a fixed mortgage:

• Work on your credit score: Improving your credit score is crucial when getting a mortgage because it directly affects your ability to qualify for a loan and the terms you'll be offered by lenders.
• Save for a down payment: Saving for a down payment is beneficial when applying for a mortgage because it demonstrates financial responsibility, reduces the loan amount and LTV, potentially improves interest rates, and expands your loan options. A larger down payment can also lead to lower monthly payments and may help you avoid the cost of private mortgage insurance.
• Choose a mortgage lender: Shopping around for a mortgage lender is vital for obtaining the best possible terms and costs for your mortgage. By comparing interest rates, loan terms, closing costs, and customer service, you can make an informed decision and apply for a mortgage that aligns with your financial goals and preferences.

Calculating Your Mortgage Costs

Calculating your mortgage cost will vary depending on variables like the home price, debt-to-income ratio (DTI), down payment, and loan term. Mortgage rates fluctuate constantly and play a significant role in calculating your mortgage cost.

The easiest and most efficient way to calculate your mortgage cost is to utilize Rocket Homes^SM mortgage calculator. A mortgage calculator can estimate your monthly payment. The calculator can also help determine the type of loan you can apply for, how much of a down payment will be needed for the property desired, and what the interest rate would be depending on different variables like income, credit score, length of the loan term, etc.

Fixed-Rate Mortgages Vs. Adjustable-Rate Mortgages (ARMs)

Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are compared because they are two primary types of home loans available to borrowers, and both types have distinct features that suit different financial situations and preferences.

Fixed-rate mortgages have constant interest rates throughout the loan term. Adjustable-rate mortgages, on the other hand, start with a fixed interest rate for an initial period (often 3, 5, 7, or 10 years), but periodically adjust based on a specific financial index rate. The rate adjustment can increase or decrease the interest rates attached to the home loan, introducing potential risk during adjustment periods.

Fixed-Rate Mortgage FAQs

Still, wondering if a fixed-rate mortgage is right for you? Here are some frequently asked questions that will help you evaluate your options:

Are fixed-rate mortgages a good idea?

Whether a fixed-rate mortgage is the most suitable option depends on your financial situation, goals, and risk tolerance. If you plan to stay in your home for a long time and prefer stability in your monthly payments, a fixed-rate mortgage might be the right fit. But if you are comfortable with some level of uncertainty and believe that interest rates may decrease in the future, you might consider an ARM.

Is it hard to get a fixed-rate mortgage?

Obtaining a fixed-rate mortgage is not necessarily difficult, but it involves a thorough application and approval process. The difficulty can vary based on several factors, including your financial situation, credit history, income stability, and the lender's requirements.

What are the risks of fixed-rate mortgages?

Fixed-rate mortgages may have slightly higher initial interest rates than adjustable-rate mortgages (ARMs), which typically start at lower rates. Also, if market interest rates drop significantly after you've locked in your fixed-rate mortgage, you won't be able to benefit from lower rates without refinancing. Fixed-rate mortgages offer less flexibility than ARMs. If you plan to move or refinance within a few years, an ARM might be a better option.

Who is a fixed-rate mortgage best for?

A fixed-rate mortgage is best suited to individuals who prioritize stability, predictability and long-term financial planning. If you intend to stay in your home for a significant period, a fixed-rate mortgage can provide peace of mind. Individuals with fixed incomes, such as retirees, may find a fixed-rate mortgage most suitable when managing their finances because their mortgage payments won't change over time.

The Bottom Line

If you want to avoid monthly payments changing down the road, a fixed-rate loan can make sense, especially if you can lock down a low interest rate. As we’ve seen, you never know what the future holds for market trends. Ultimately, the type of mortgage you choose depends on your financial situation, and what you’re comfortable with.  

If you’re ready to start the mortgage process, you can begin your application online with Rocket Mortgage^®.