Fixed Rate Mortgages

A fixed rate mortgage is a mortgage loan where the interest rate on the note remains the same through the term of the loan. Fixed rate mortgages are the most classic form of loan for home and product purchasing in the United States. The most common terms are 15 year fixed, and 30 year fixed mortgages, but shorter terms are available, and 40 year fixed, and 50 year fixed mortgages are now available (common in areas with high priced housing, where even a 30 year fixed term leaves the mortgage amount out of reach of the average family).

Outside the United States, fixed rate mortgages are less popular, and in some countries, true fixed rate mortgages are not available except for shorter-term loans. For example, in Canada the longest term for which a mortgage rate can be fixed is typically no more than ten years, while mortgage maturities are commonly 25 years.

Fixed rate mortgages are usually more expensive than adjustable rate mortgages. Due to the inherent interest rate risk, long-term fixed rate loans will tend to be at a higher interest rate than short-term loans. The difference in interest rates between short and long-term loans is known as the yield curve which generally slopes upward (longer terms are more expensive). The opposite circumstance is known as an inverted yield curve and is relatively infrequent.

The fact that a fixed rate mortgage has a higher starting interest rate does not indicate that this is a worse form of borrowing compared to the adjustable rate mortgages. If interest rates rise, the ARM cost will be higher while the FRM will remain the same. In effect, the lender has agreed to take the interest rate risk on a fixed rate loan. Some studies have shown that the majority of borrowers with adjustable rate mortgages save money in the long term, but that some borrowers pay more. The price of potentially saving money, in other words, is balanced by the risk of potentially higher costs. In each case, a choice would need to be made based upon the loan term, the current interest rate, and the likelihood that the rate will increase or decrease during the life of the loan. FHA mortgages, VA loans, Super Jumbo loans, and other home loan programs usually are offered as a fixed rate mortgage.