With the median U.S. home sale price sitting at $412,300 in mid-2024, most people will need a mortgage to fund their purchase, and the majority of them will choose a fixed-rate loan, in which the interest rate does not fluctuate over the life of the loan.
But if you’re preparing to take the homeownership plunge, how do you know which kind of loan is right for you and what are the pros and cons of fixed-rate mortgages? Let us be your guide.
What Is a Fixed-Rate Mortgage?
A fixed-rate mortgage is, as its name suggests, a mortgage loan whose interest rate is fixed across the lifetime of the loan. The rate is stated at the time the documents are signed and does not change at any point throughout the loan term (provided that all payments are made in full and on time). Fixed-rate mortgage terms can be 10, 15, 20, or 30 years. A mortgage calculator can help you work through the different monthly payments for each and see what best suits your situation.
Fixed-Rate Mortgages vs Adjustable-Rate Mortgages
If you’re deciding between a fixed-rate vs. adjustable-rate mortgage (or ARM), the difference is that with an ARM, the interest rate can move up or down according to the market. The rate is calculated according to the index and margin — the index is a benchmark interest rate based on market conditions at large, and the margin is a number set by the lender when the loan is applied for.
You may see options like a 5/1 ARM, which means the rate is set for the first five years of the loan and then adjusts annually after that.
Long story short: A fixed-rate mortgage offers you a predictable interest rate and monthly payment, whereas an adjustable-rate mortgage can shift over the course of the loan term according to external factors, like inflation affecting the APR.
It is, however, important to understand that your total monthly housing bill can still change, even with a fixed-rate mortgage, if, for example, your property taxes or homeowners insurance rates change or if you miss several payments.
Recommended: Home Loan Help Center
Types of Fixed-Rate Mortgages
There are a few variables to fixed-rate mortgages.
• Conventional Loans: Conventional fixed-rate mortgages are offered by banks, credit unions, and other lending institutions. They typically have stringent requirements about credit score and debt-to-income ratio (or DTI) that an applicant must meet.
• Government-Insured Loans: FHA, USDA, and VA mortgages tend to have less tough requirements and target certain kinds of homebuyers, like those with lower income, in the military (past or present), and living in rural areas. They may offer no or low down payment and other perks, too.
• Conforming and Non-Conforming Loans: Mortgages can also be considered “conforming” or “nonconforming,” depending on whether or not they meet the guidelines established by the Federal Housing Finance Agency (commonly known as Fannie Mae and Freddie Mac). In 2024, the conforming loan limit for one-unit properties was $766,550, or $1,149,825 in areas deemed “high cost.”
Of course, homes costlier than these limits exist, and it is possible to take out a mortgage to buy one. Those loans are considered “nonconforming” and are also sometimes called “jumbo loans.”
Because the loans are so large, eligibility requirements tend to be more stringent, with borrowers usually needing a down payment well above 3%, cash in the bank, and a solid credit score.
Example of a Fixed-Rate Mortgage
Here’s an example of how a fixed-rate mortgage might work if you buy a house for $428,700 with 20% down and take out a 30-year fixed-rate home loan. Your mortgage principal will be $342,960, and at a rate of 6.72% with a solid credit score of 740+, your monthly payment (not including any taxes or insurance) will be $2,217.
As you make your loan payments, at first most of the money goes towards interest. This is because the interest is “front-loaded,” to use the industry lingo. Perhaps 90% of your payment will be paying interest and 10% will be applied to the principal. As you get to the end of your loan payment, these figures may well be reversed. That is, 10% of the $2,217 goes towards interest and 90% toward the principal.
Pros and Cons of Fixed-Rate Mortgages
Fixed-rate mortgages are more common among homebuyers because of the predictability they offer. Still, there are both drawbacks and benefits to pursuing this kind of home loan.
Benefits of Fixed-Rate Mortgages
Because homebuyers who take out fixed-rate mortgages will know their rates at the time they sign on the dotted line, these loans provide long-term predictability and stability — which can help people who need to fit their housing expenses into a tight budget.
Fixed-interest mortgages, and other types of fixed-rate loans, shield borrowers from potentially high interest rates if the market fluctuates in such a way that the index significantly rises.
Drawbacks of Fixed-Rate Mortgages
Although fixed-rate mortgages are more predictable over time, they tend to have higher interest rates than ARMs — at least at first. Sometimes an ARM might have a lower interest rate but only for a relatively brief introductory period, after which the rate will be adjusted.
If the index rate falls in the future, homebuyers might end up paying more in interest than they would have with an ARM.
Because lenders risk losing money on fixed-interest mortgages if index interest rates go up, these loans can be harder to qualify for than their adjustable-rate counterparts.
How to Calculate Fixed-Rate Mortgage Payments
Now that you know what a fixed-rate mortgage is and how it functions, you might wonder how much it could cost you. If you are curious about what fixed-rate mortgage payments would look like at different home price points, for varying terms, you use an online mortgage calculator or, for an even more detailed look at what you’ll pay each month, check out a mortgage calculator with taxes and insurance.
When Is a Fixed-Rate Mortgage the Right Choice?
Fixed-rate mortgages offer long-term predictability, which can be a must for those who need budget stability. Furthermore, fixed interest rates can be beneficial for those who plan to stay in their home for a longer period of time — say, at least seven to 10 years.
Here’s why: Homebuyers with 30-year fixed-rate loans may need that long to build home equity (remember: during the initial years of the loan most of your payments go toward interest, not equity).
Finally, if homebuyers suspect that interest rates are about to rise, a fixed-interest loan can be a good way to protect themselves from those increasing rates over time.
That said, there are some instances in which an ARM may be a better choice. If a homebuyer is planning to sell in a short amount of time, for example, the low introductory interest rate on an adjustable-interest loan could save them money (as long as they can sell the property) before the rate can tick upward.
Recommended: First-Time Homebuyer Guide
The Takeaway
Fixed-rate loans, in which the interest rate holds steady for a loan term of 10, 15, 20, or 30 years, are popular in part because their costs are predictable. But when you’re in the market for a home, shopping for the right loan is almost as important as shopping for the house itself, so an adjustable-rate mortgage might be worth a look too, especially if you need a lower monthly payment and don’t plan to stay in the home for very long.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
FAQ
Can you refinance a fixed-rate mortgage?
Yes, you can refinance a fixed-rate home loan. Because refinancing means taking out an entirely new loan and involves some upfront costs, it’s important to make sure that these costs don’t outweigh the savings you will enjoy due to, say, a lower interest rate or a shorter loan term (two of the chief reasons people opt to refinance).
How does a fixed-rate mortgage work?
With a fixed-rate mortgage, your interest rate — and thus your monthly loan payment amount — holds steady for the duration of the loan, which might be 10, 15, 20, or 30 years. Many borrowers like having one of their largest household expenses be predictable.
What are the disadvantages of a fixed-rate mortgage?
The biggest drawback of a fixed-rate mortgage is that the interest rate will likely be higher than that of an adjustable-rate loan. And if you sign on to a fixed-rate mortgage and interest rates drop significantly, you may find yourself looking at a refinance sooner than you would like.
SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.
SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility for more information.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
SOHL-Q324-044