As its name implies, a fixed rate mortgage (FRM) is a home loan where the interest rate remains fixed for the entire term of the loan. Whereas the interest rate on other types of loans, such as an adjustable rate mortgage, graduated payment mortgage, negative amortization mortgage, or balloon payment mortgage may adjust or float, even if they have a fixed period with an introductory rate, the interest rate on a fixed rate mortgage always remains the same.
The fixed-rate mortgage is the traditional form of home financing in the United States, and the one most often used for a home purchase. Common terms for a fixed rate mortgage are 15 year or 30 year mortgages, but shorter or longer terms are available. You can even get up to a 50 year mortgage, in some areas with high priced housing.
Outside of the US, fixed rate mortgages are less common and in some countries, a fixed rate home loan is unavailable, except for a very short-term loan. For example, Canadian mortgage rates typically can be fixed for no more than 10 years, while the maturity on these loans is usually 25 years.
Pricing on Fixed Rate Mortgage Products
Typically, a fixed rate mortgage is more expensive than an adjustable mortgage, both in terms of its interest rate and in the long term. Fixing a rate over the long term is considered a risk to the lender, so they tend to set these loans at a higher interest rate to compensate for rising market interest. The difference between the interest rates for short and long-term loans is called the yield curve. Longer term loans are more expensive, as you pay more interest over the life of the loan.
However, the higher starting interest rate on a fixed-rate loan does not necessarily mean that an adjustable rate mortgage is a better form of financing. If interest rates go up, the rate on the adjustable rate mortgage (ARM) will go higher as well, while the FRM will remain stable. Borrowers who went with an adjustable rate mortgage to save money may find themselves paying far more out of pocket when the adjustment takes effect. You will need to take a look at the loan term, how long you plan to stay in the house, the current interest rate, and how likely you are to refinance later on, to determine which option is right for you.
