Seventy-five percent of all home loans are conventional fixed-rate mortgages. Fixed-rate mortgages have the same interest rate throughout the term of the loan.

What does this mean for you?

You never have to worry about your payments changing due to fluctuating market interest rates.

fixed rate mortgage; little house with percentage symbol on it

You have several options when choosing a fixed-rate mortgage that works for your finances. The term of your loan – which is usually 10, 15, 20, or 30 years – partly determines the size of your monthly payments. The other factor, of course, is the interest rate.

Here, we’ll review the pros and cons of getting a fixed-rate mortgage and cover the differences between each loan term.

How fixed-rate mortgages work

The interest rate you sign on when you get your mortgage is the interest rate you will have for the life of your loan.

The housing market and your credit score affect the rate you receive. If you have poor credit, you can take steps to repair it so you can get approved for a mortgage. Having the highest credit score possible will be beneficial, since the rate you qualify for when you apply will be locked in for the life of the loan.

Pros

Predictable payments. Payments on fixed-rate mortgage loans are the same amount every month. Unlike adjustable-rate mortgages, you never have to worry about payments changing because market interest rates changed.

Curious what you’ll really pay? Use our Free Mortgage Calculator.

Easier to understand. A fixed rate is a simple concept that makes your mortgage simpler. You don’t have to track market rates or worry about the little details. You simply get the interest rate you get, and it stays that way.

Protection if market rates rise. Market interest rates constantly fluctuate. Although the rate on a 5/1 ARM is the same for the first 5 years, it changes with the market after that, and you can end up paying more in interest. A fixed-rate mortgage prevents this.

Tax deductions. Taxpayers making payments on their first or second mortgage can deduct interest payments from their taxes. Interest up to $1,000,000 can be deducted.

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Cons

Market interest rates could drop. Unless you refinance, you’re stuck with the rate you got when you signed on your loan. This can be a pro – unless market interest rates drop after you make the agreement.

It could cost more in the end. The longer the term, the more interest you pay over time. Choosing a long-term mortgage will get you lower payments, but you’ll pay more over the life of the loan. If you lock in a higher interest rate, then you could end up paying thousands more in interest.

Rates can be higher than in the beginning of an ARM. An ARM (adjustable-rate mortgage) has a fixed interest rate for the first several years (usually five or seven, depending on what you sign up for). Fixed-mortgage rates could be higher than the initial rates of an ARM. However, once the beginning of the ARM is over, the rate could become more volatile.

Q:Why can the monthly payments on fixed-rate mortgage change?

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A: The monthly payments on a fixed-rate mortgage can change due to changes in property taxes or insurance. Traditional mortgage payments cover Principal, Interest, Property Taxes, Insurance (PITI). So, while the principal and interest portion of a fixed-rate mortgage payment remains constant, property taxes and insurance can change. This can result in an increase or decrease in your mortgage payment. Changes in these two factors will only occur annually.

30-year mortgage

The 30-year fixed-rate mortgage is the most popular type of mortgage – and the longest-term you can get. You repay it over 360 monthly payments.

Best for those who…

Plan to stay in the home for a long time. If you’re going to be in the home for decades, thirty years of lower payments makes financial sense.

Want lower payments. Longer terms mean lower payments. This could make homeownership more affordable for many consumers.

Aren’t worried about building equity slowly. Because the term of the loan is so long, you won’t build up equity very quickly with this type of mortgage. This shouldn’t matter if you’re not looking for quick access to your home’s equity.

Pros

Lower monthly payments. This is pretty self-explanatory. You won’t pay as much per month with this loan. In the beginning, much of your payment will go toward the interest. As time passes, more and more will go toward the principal.

Can afford a higher value home. Since consumers have more time to pay the loan back and the payments are more affordable, banks usually approve higher loan amounts. You could afford more home with a 30-year mortgage than with a shorter-term one.

Cons

Higher interest rates. It takes a long time for banks to make their money back on these long-term loans. Therefore, 30-year mortgages usually have higher interest rates so the mortgage lenders can make more money.   

Pay more interest over time. More payments mean more times that interest is applied to what you owe. Over time, you will pay more interest on a 30-year mortgage than on shorter-term loans.

20-year mortgage

Best for those who…

Are refinancing. This mortgage term is great for people who are refinancing a 30-year mortgage but don’t want to go back to the 30-year term.

Pros

Save on interest. This loan has 240 payments as opposed to the 360 in a 30-year loan. Fewer payments means you pay less interest in the end.

Cons

Higher monthly payments than 30-year mortgage. The term is shorter, so to repay the same amount, your monthly payments have to be larger. This will generally only be an issue if you use cash out refinancing to borrow against the equity that you built up.

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15-year mortgage

Best for those who…

Want to build equity fast. One of the biggest perks of homeownership is being able to use your home’s equity. The shorter the term of your loan, the faster that equity grows.

Can afford higher payments. The higher payments are what makes the equity grow so quickly. If you can afford them, a 15-year mortgage could work for you.

Pros

Can pay it off faster. Besides building equity faster, you will also be able to pay off the loan faster than you would with a 20- or 30-year mortgage.

Lower interest rate. These mortgages usually have lower interest rates, again due to the shorter term.

Less interest paid over time. Fewer payments = less overall interest. There are only 180 payments involved in a 15-year mortgage.

Cons

Higher payments. For homes of identical value, 15-year mortgage payments will be higher than those of both 20- and 30-year mortgages.

Won’t qualify for as big of a mortgage. Higher payments mean the bank is taking on more risk lending to you. Because of this, the amount you’ll be able to borrow may be smaller than with longer-term loans.

10-year mortgage

Best for those who…

Can afford higher payments. Of all the loan terms available, this will likely have the highest monthly payments. Make sure you can afford these before agreeing to such a short term.

Want to sell relatively soon. The more you’ve already paid off, the more profit you could earn when selling.

Pros

Can pay it off faster. Since it has the shortest term, a 10-year mortgage is the fastest to pay off. If you can afford it and you don’t want to worry about monthly payments in ten years, this could make sense for you.

Lower interest rate. The bank makes its money back faster with shorter-term loans. You’ll get a lower interest rate to encourage you to choose this repayment schedule, which only has 120 payments.

May be better than some ARMs. The rates on this short loan may be even better than the initial rates of some adjustable-rate mortgages. Compare your offers to see which is lower, especially if you’ll be selling within the next five years.

Cons

High payments. This type of mortgage has the shortest term of four discussed here. It will therefore have higher payments on homes of similar values.

Which is better: 30-year or 15-year?

Question: I’m sick of renting and dealing with landlords and loud neighbors. I’ve been saving for a house and now have $9,000 for a down payment. I have a good steady job. I recently paid off my credit cards just like you always talk about. I’m looking for houses and researched how the home-buying process works.

But one thing I can’t figure out: Is it better to do a 30-year mortgage or a 15-mortgage? Everyone I talk to says different things. I know I’ll pay more interest with 30-year mortgage rates, but I’ll have lower payments than a 15-year. What would you do?

— Cassie in Texas

Howard Dvorkin CPA answers…

I can’t answer your questions, Cassie, without posing a few of my own…

1. On a 15-year mortgage, will your monthly payments total no more than 28 percent of your monthly income? That’s what my friends at Bankrate suggest, although I’d prefer you keep that number to 25 percent.

2. Do you have any other big debts you’re paying off? For example, do you have a big auto loan? If so, that interest rate is surely much higher than on your mortgage. I’d lean toward the 30-year mortgage until you pay off that car and save some money. (See below.)

3. Do you have an emergency fund? Financial experts differ on this point, but if you don’t have enough money in the bank to cover your monthly expenses for at least a couple months, it makes no sense to save interest on your new house when one bad accident or illness will send you to the poor house.

4. Are you contributing to your retirement? Even if you’re just depositing $25 into a 401(k), it helps. I don’t know how old you are, Cassie, but it makes no sense having your house paid off in 15 years if you’re retiring at the same time with no money to buy food.

Article last modified on October 7, 2020. Published by Debt.com, LLC

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Howard Dvorkin, CPA

CPA and Chairman