What Is a Fixed-Rate Mortgage?

What Is a Fixed-Rate Mortgage?

A fixed-rate mortgage loan, often called an FRM for short, is a home loan that locks in your interest rate for the duration of your repayment term. Because the rate never changes, your monthly principal and interest payment will stay the same, giving you more predictability.

How Does a Fixed-Rate Mortgage Work?

Fixed-rate mortgages are relatively straightforward, which is one of the reasons why they're overwhelmingly more popular than adjustable-rate mortgages (ARMs). Here's some more insight into how FRMs work:

• Interest rate: Your loan's interest rate will depend on several factors, including your creditworthiness, economic conditions, your down payment and more. However, once you close on your loan, your rate won't change, even if the underlying factors do.
• Term: The most common repayment term for a fixed-rate mortgage loan is 30 years, but some lenders may also offer terms of 10, 15 or 20 years.
• Monthly payment structure: There are four components of a mortgage payment, including principal, interest, taxes and insurance. With an FRM, the principal and interest portions of your payment won't change. However, your property taxes and insurance premiums can still fluctuate over time.

Learn more >> How Does Mortgage Interest Work?

Types of Fixed-Rate Mortgages

Most home loan programs offer fixed interest rates, but some may also offer adjustable-rate options. As you consider your options, here are the most common types of fixed-rate mortgages.

Conventional Loans

A conventional loan is any mortgage loan that isn't backed by a federal agency. A conforming conventional mortgage is a loan that meets specific criteria set by Fannie Mae and Freddie Mac, which provide backing for conventional lenders.

If a loan doesn't meet the criteria for loan amounts, credit score and documentation requirements or loan structure, it may be considered a non-conforming loan. While these loans can be beneficial for certain borrowers, they tend to charge higher interest rates.

Government-Backed Loans

Depending on your situation, it may make more sense to apply for a government-backed loan instead of a conventional loan. These loans also offer fixed interest rates:

• Federal Housing Authority (FHA) loan: This option may be worthwhile if you have low to moderate income or a lower credit score. FHA loans may also offer lower down payment requirements compared to some conventional loan programs.
• Department of Veterans Affairs (VA) loan: VA loans are designed specifically for eligible members of the military community. They don't require a down payment or ongoing mortgage insurance premiums.
• U.S. Department of Agriculture (USDA) loan: You may consider a USDA loan if you have low to moderate income and plan to buy a home in an eligible rural area. There's no minimum down payment requirement.

Jumbo Loans

A jumbo loan is a type of non-conforming loan that exceeds the standard limit for conventional loans set by the Federal Housing Finance Agency. For 2024, that limit is $766,550 for one-unit properties in most of the country, but it can go as high as $1,149,825 in areas with a high cost of living. It's also possible to get a jumbo government-backed loan.

Because they pose more of a risk to lenders, jumbo loans typically require a higher minimum credit score and a larger down payment to get approved.

Pros and Cons of a Fixed-Rate Mortgage

While FRMs are the most common type of mortgage loan, there are both advantages and disadvantages to consider before applying for one.

Pros

• Predictability: Although your monthly payment can still change as taxes and insurance premiums fluctuate, you'll get much more predictability with an FRM compared to an adjustable-rate mortgage (ARM). This can be particularly beneficial if you're on a relatively tight budget or if you want to maximize your cash flow for other financial goals and lifestyle spending.
• Protection against rising rates: If market interest rates increase after you close on your mortgage loan, you don't have to worry about yours following suit.
• Easier comparison shopping: Because fixed-rate mortgages are more popular, you'll have an easier time finding options across different lenders and loan programs.

Cons

• No benefits if interest rates drop: If market interest rates fall after you close on your loan, the only way to take advantage of the savings is to refinance your loan. Unfortunately, that decision will come with another set of closing costs, and there's no guarantee that your interest savings will make it worth your while.
• No introductory rate: With an ARM, you typically get an introductory fixed rate for a set period of time. That rate is usually lower than what you'd get with a comparable FRM, making ARMs more appealing to borrowers who expect to move or refinance within a few years.
• May be harder to get: Because FRMs typically charge higher rates upfront compared to ARMs, you may need a lower debt-to-income ratio (DTI) or a better credit score to qualify for the slightly higher monthly payment.

Fixed-Rate Mortgage vs. Adjustable-Rate Mortgage

The other standard home loan option is an adjustable-rate mortgage. Here are some differences between the two:

An adjustable-rate mortgage typically offers a fixed interest rate for an introductory period ranging from one to 10 years. After that, the interest rate can change every six or 12 months, depending on market conditions and your loan's terms.

Lenders typically set limits on how much your interest rate can fluctuate with each adjustment period and over the life of the loan. However, rising interest rates can still result in a much higher monthly payment over time. On the flip side, falling market rates can result in big savings for ARM borrowers.

In general, an ARM may make more sense during periods of rising interest rates, so you can take advantage of the lower introductory fixed rate. You may also consider one if you anticipate moving or refinancing before the fixed-rate period expires.

Learn more >> Common Types of Adjustable-Rate Mortgages

Should You Get a Fixed-Rate Mortgage?

Before applying for a fixed-rate mortgage, it's important to understand your situation, needs and goals. In particular, here are some scenarios where it could make sense to opt for an FRM and when it might not.

When to get a fixed-rate mortgage:

• Payment predictability is your top priority
• You can afford a slightly higher monthly payment
• You're planning to stay in your home for a long time
• You expect market interest rates to rise in the near future
• You don't mind refinancing in the future to secure a lower rate

When not to get a fixed-rate mortgage:

• A lower introductory payment is your top priority
• You're planning to sell your home or refinance within a few years
• You expect market interest rates to drop in the near future
• You don't mind refinancing to switch to a fixed-rate mortgage if needed

How to Get a Fixed-Rate Mortgage

If you've determined that an FRM is right for you, here are some steps you can take to prepare yourself to apply and maximize your chances of getting approved.

1. Review Your Credit

For many home loan programs, the minimum credit score is 620. However, FHA loan requirements can go as low as 580 or even 500 in some cases, and jumbo loans may require a score closer to 700.

To see where you stand, you can get free access to your Experian credit report and FICO^® Score^☉ . Even if your credit score meets the minimum requirements, you may qualify for a lower interest rate if you take steps to improve your credit before you apply.

2. Evaluate Your Finances

Review your budget and savings to get an idea of how much house you can afford, including how much you can put toward a down payment and closing costs.

At this point, you can also consider getting prequalified with a mortgage lender or broker. This process doesn't require a hard credit check or commitment and can help you determine how much you can potentially borrow.

3. Shop Around

Once you're ready to move forward, consider getting preapproved with at least a few lenders. This process involves submitting a full application and undergoing a hard credit check, but it can help you compare interest rates, closing costs and other terms to ensure you get the best deal.

4. Pick a Lender

Choose the best offer you find and move forward with that lender. At this point, you can start shopping for a house if you haven't already done so. When you find the right home and make an offer, you'll continue with the underwriting process until you're ready to close.

Learn more >> How to Shop for a Mortgage

Safeguard Your Credit Throughout the Mortgage Process

Whether you're just starting to consider buying a home or you're nearing your closing date, it's crucial that you continue to practice good credit habits.

It's also important to regularly monitor your credit to track your progress in improving your score and addressing potential issues as they develop. Promptly responding to problems can make it easier to fix them before things get out of hand.

With Experian's free credit monitoring service, you'll get access to your FICO^® Score and Experian credit report, along with real-time alerts when changes are made to your report. You'll be able to keep an eye on how your credit is doing, so you're ready when it's time to apply for a mortgage.