A fixed mortgage loan is essentially a home loan where the interest rate remains “fixed” throughout the life of the loan. That means your mortgage rate will never increase or decrease as you repay the debt.
A fixed mortgage is the most common loan used to secure a home by most buyers. By having a “fixed rate,” the buyer is assured that their monthly payments of principal and interest will remain constant over the life of the loan. The most common types are the 30-year fixed mortgage and the 15-year fixed mortgage.
During the initial years of loan repayment on a 30-year fixed mortgage, the bulk of the payment amount goes toward paying down the interest on the loan. The upside is that this mortgage interest is tax-deductible and can minimize federal taxes owed come April 15th. The downside, however, is that a 30-year loan term means it will take longer to build home equity.
With a 15-year fixed mortgage loan, the interest rate is higher but the borrower builds home equity much faster (than with a 30-year fixed mortgage). Additionally, the overall interest bill on a 15-year fixed mortgage will be lower because the loan is being repaid in half the time.
If a homebuyer wants to get the most house they can afford and also keep their monthly mortgage payments manageable, a 30-year fixed mortgage is probably the better choice. A 30-year fixed mortgage will likely have lower monthly payments, but a higher interest bill overall. As your financial situation changes over the years, you may elect to refinance your mortgage to a shorter loan term or lower interest rate.
The biggest challenge for a homebuyer who is trying to secure a fixed mortgage may lie in negotiating the best mortgage rate. Your credit score and credit report can affect the interest rate you are offered on a fixed mortgage. Note that the mortgage lender is more vulnerable with a 30-year fixed mortgage, since the interest rate is unchanging and they will not be repaid for three decades.
The interest rate on a fixed mortgage is generally higher than that of an adjustable-rate mortgage. This is because the mortgage lender is basically assuming all the risk on the interest rate.
Mortgage rates are calculated using an index and a margin. The margin on a 30-year fixed mortgage will be higher than on a 15-year fixed mortgage or an adjustable-rate mortgage, because the lender is subjected to higher risk for a longer period of time. With an adjustable-rate mortgage, the lender shares the risk of rising/falling interest rates with the borrower.