Fixed-rate mortgages: How they work, pros and cons

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• A fixed-rate mortgage locks in your rate for the duration of your loan.
• Many lenders offer multiple fixed-rate terms, including 30-year, 20-year, or 15-year fixed-rate mortgages.
• A fixed rate can be a good option if you want a predictable monthly payment.

When you buy a home, you'll choose between two basic types of mortgages: an adjustable-rate mortgage and a fixed-rate mortgage .

An adjustable-rate mortgage locks in your rate for the first few years or so, then periodically changes over time — typically once or twice per year.

A fixed-rate mortgage locks in your rate for the duration of your loan, which could be as long as 30 years. Although US mortgage rates will increase or decrease over the years, you'll still pay the same interest rate in 30 years as you did on your very first mortgage payment.

How fixed-rate mortgages work

Mortgage rates are always fluctuating based on current market trends and investor demand. When you get a mortgage, your lender will offer you a rate that's based on both these larger economic trends as well as your own financial profile. Prior to closing, you'll lock in your rate.

If you have a fixed-rate mortgage, that rate won't change for the entire time you're paying off your mortgage. This means your monthly payment will remain relatively stable — though changes in the other factors that make up your mortgage payment, such as taxes or insurance, can cause the amount you owe each month to increase over the years.

30-year vs. 15-year fixed rates

A 30-year fixed-rate mortgage is the most common term length for a fixed-rate loan, but many lenders offer multiple options, including 30-year, 20-year, and 15-year fixed-rate mortgages. Some lenders offer other term length options, too.

The longer your term is, the lower your monthly mortgage payments will be, because you spread the loan out over a long period of time.

Shorter terms do have some benefits, though. Mortgage lenders charge lower interest rates for shorter terms, and you'll be making monthly payments for a shorter amount of time — these factors combined mean you could end up paying tens of thousands of dollars less over the life of your loan if you choose a 15-year or 20-year mortgage over a 30-year loan.

A fixed-rate mortgage may lock in your interest rate, but you still have options. You can make more than your minimum payment every month to knock out the loan more quickly , or you can refinance for a lower rate or shorter term.

Or you may just decide to stick with your original mortgage and let things play out. Do whatever is best for your financial situation.

Fixed-rate mortgage pros and cons

Pros

• If mortgage rates increase, you get to keep your lower rate. US mortgage interest rates fluctuate along with the state of the economy, but you don't have to sweat it if rates increase at any point during the life of your loan.
• Predictable payments can make it easier to plan a budget. Granted, certain payments that are wrapped up in your mortgage could change over the life of your loan, such as private mortgage insurance or property taxes. But your interest rate will stay the same from year to year, which could make it easier for you to plan out your monthly expenses overall.

Cons

• If mortgage rates decrease, you keep your higher rate. If rates start trending down, you won't benefit from lower rates unless you refinance.
• Adjustable rates may start lower. ARM rates are generally lower than fixed rates. An ARM may be better if you plan to move before the intro-rate period ends so you don't risk your rate increasing later.

A fixed-rate mortgage provides stability, but the trade-off is that you'll be paying more interest than you would with an ARM. If you plan to stay in your home for a long time or just prefer the predictability of a fixed rate, this might be worth it to you.