Fixed-rate mortgage

Also called FRM

A home loan whose interest rate stays the same for the entire term, so the principal and interest payment never changes.

What it means

With a fixed-rate mortgage, the interest rate is locked when the loan closes and does not change for the life of the loan, whether that is 10, 15, 20 or 30 years. The principal and interest portion of the payment is identical every month.

The total monthly bill can still change if property taxes or insurance paid through escrow go up or down. Fixed-rate loans tend to suit buyers who plan to stay in a home for many years and value a predictable payment over the chance of a lower starting rate.

Formula

M = P × r(1 + r)^n / ((1 + r)^n − 1)

M = monthly payment (principal and interest)
P = amount borrowed
r = annual interest rate ÷ 12
n = total number of monthly payments

Example

For example, a $250,000 30-year fixed loan at an illustrative 6.5% has a principal and interest payment of about $1,580.17 in month 1 and in month 360. Over the full term the borrower pays roughly $318,861 in interest.

How it’s used

Buyers planning to stay put for a long time
Households on a tight or fixed budget
Borrowing when rates are low relative to history

Strengths and weaknesses

Strengths

Payment is predictable and easy to budget
Protected if market rates rise
Simple to understand and compare

Weaknesses

Starting rate is often higher than an ARM’s introductory rate
If rates fall, lowering the rate requires refinancing and paying closing costs
Long terms mean large total interest

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.