A fixed rate mortgage is a loan in which the interest rate remains the same during the entire life of the mortgage. Some other types of loans, such as an adjustable rate mortgage, graduated payment mortgage, negative amortization mortgage, or balloon payment mortgage may include a fixed rate period for a stipulated length of time, usually as an introductory or teaser rate. Thus, they are not fixed rate mortgages.
Fixed rate mortgages are the most popular type of home loans in the United States and constitute a large percentage of overall home loan products sold. The biggest benefit of this type of mortgage is that it remains consistent; allowing you to know exactly what your mortgage interest and principal payments will be at all times, so that you can plan your budget accordingly.
Fixed rate mortgages can be taken out for different lengths of time, known as terms. The term of your loan can vary for any length of time, but typical terms in the United States are 15 year mortgages and 30 year mortgages.
A fifteen year mortgage is often a popular option for refinancing a home or for taking out a second mortgage. It offers a shorter term than a 30 year mortgage, which means that the overall cost of the loan is lower than a 30 year mortgage.
By virtue of the fixed rate, you are assured that the interest rate will remain unchanged for the duration of the mortgage.
For example, lets say you decide to redo your kitchen. To finance the home improvement, you take out a 15 year fixed loan as a second mortgage, at 6% interest. That rate will not change no matter what happens to the market rate of interest. Whether the market index goes up to 7% or goes down to 5%, your interest rate will remain the same. Compared to an adjustable rate mortgage (ARM), this type of home loan is simple, easy to understand and consistent. It is best suited to someone who wants a reliable idea of what their payments will be from month to month.
