Because they give borrowers something many people want: predictable payments, they have historically made up the vast majority of home loans. Fixed-rate mortgages are the most popular choice for homebuyers in the US. The biggest benefit is that the interest rate stays the same. Once the mortgage closes, the rate is locked in and does not change even if market rates rise later.
In the first year of a 30-year loan, only about $250 of a nearly $2,000 monthly payment would go toward principal, while about $1,750 would go toward interest. The 30-year fixed mortgage is by far the most common term. Nearly 90% of borrowers choose a 30-year term, according to Freddie Mac, a government-sponsored mortgage company. The biggest advantage of the 30-year term is lower monthly payments.
Because of changes in the market, homeowners do not have to worry about their mortgage rate suddenly increasing. Because the borrower takes longer to repay the loan, more interest can build up over the full term. The main alternative to a fixed-rate mortgage is an adjustable-rate mortgage, or ARM. Unlike a fixed mortgage, the interest rate on an ARM can change based on market conditions. The problem is that ARM’s future rate is uncertain. After the initial period, the rate can rise, which could increase both monthly payments and the total cost of borrowing. A fixed-rate mortgage removes that interest-rate risk. This predictability can be especially useful for people who plan to stay in their home for many years. It can make monthly budgeting and long-term financial planning easier. A fixed mortgage can also make sense for people who do not want to take much financial risk. Spreading the loan over three decades makes the required payment more affordable for many buyers. The tradeoff is higher total interest. Several factors determine the fixed mortgage rate a borrower receives. One of the biggest is the borrower’s credit score. A higher credit score can help a borrower get a better rate. Lenders generally see borrowers with stronger credit as lower-risk customers. The size of the down payment also matters. A larger down payment can reduce the lender’s risk and may help the borrower qualify for a lower rate. Market conditions also influence mortgage rates. Inflation and Federal Reserve policy can affect the rates lenders charge borrowers. Mortgage rates can change frequently. Rates can be different from one day to the next as financial and economic conditions change. The biggest reason most buyers choose fixed-rate mortgages is simple: stability. Buyers know their mortgage interest rate will not increase during the loan term, which makes it easier to plan their finances. A fixed-rate mortgage may be a strong choice for a long-term homeowner.
