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Fixed Rate Loan FAQs

Here are some frequently asked questions about fixed rate loans.

By: Mutual of Omaha Mortgage

What Is a Fixed Rate Mortgage Loan?

For many prospective homebuyers, selecting a mortgage loan is as important as finding a property to purchase. A fixed rate mortgage loan is a type of mortgage loan in which the borrower is locked in to a defined interest rate over the lifetime of the loan. Unlike a variable or adjustable rate loan, the interest rate on a fixed rate mortgage loan will not change over time in relation to changes to common mortgage indexes such as the prime lending rate. A fixed rate mortgage loan option is available as part of the following mortgage loan programs: conventional, FHA, VA, USDA and jumbo.

How Do Fixed Rate Mortgages Work?

Most fixed rate mortgages are fully amortized loans, which means they are based on periodic loan payment plans with a predetermined term and interest rate. Fixed rate mortgages enable a borrower to pay back a portion of their principal and interest when they make their monthly mortgage payment. The monthly mortgage payment will not fluctuate with interest rate changes in the market. A borrower who purchases a home with a fixed rate mortgage can expect to have the same monthly payment over the lifetime of the term of their loan.

What Are The Pros & Cons Of A Fixed Rate Mortgage?

One of the most widely known advantages of a fixed rate loan is its predictability. Many borrowers perceive fixed rate mortgage loans as safe because there is less risk compared to an adjustable or variable rate loan. Fixed rate mortgages are available in a variety of terms, such as 15-year, 2-year and 30-year. If a borrower plans to live in their new home for at least 10 years, a fixed rate loan may be the best fit for their financial goals.

Although a fixed rate mortgage is often attractive to prospective homebuyers because of its certainty and stability, typically the interest rate for a fixed rate mortgage loan is higher compared to the interest rate of an adjustable rate mortgage loan. Also, because of the amortization of a fixed rate loan, a homeowner will likely pay off their loan’s principal at a slower rate compared to an adjustable rate loan.

What Is The 30 Year Fixed Rate Mortgage Loan?

According to Freddie Mac, the 30-year fixed rate mortgage loan is one of the most widely used loans by borrowers in the U.S. This loan is known for predictability and affordability. The 30-year fixed rate mortgage loan is a long-term loan in which the interest rate is locked for a minimum period of 30 years. The average 30-year fixed mortgage rate has remained below 5.00% since 2011 and has steadily declined since 2018 according to the Freddie Mac Primary Mortgage Market Survey. Because of the length of the loan term, the 30-year fixed rate loan typically helps borrowers commit to a regular monthly payment that is lower compared to a shorter term loan. Interest rates change daily, to learn the current interest rate for a 30-year fixed mortgage loan, click here.

What Is The 20-Year Fixed Rate Mortgage Loan?

The 20-year fixed rate mortgage is similar to the 30-year fixed rate mortgage loan, however the term is shorter in duration. The 20-year fixed rate loan has all of the stability, consistency and affordability benefits of a fixed rate loan however a borrower’s payment will be slightly greater than a 30-year fixed rate loan because of the term difference. However, because of the shorter term, the borrower of a 20-year fixed rate loan will likely pay far less in interest over the life of the loan compared to the borrower of a 30-year fixed rate loan. The interest rate for a 20-year fixed rate mortgage loan is often slightly lower than the 30-year fixed rate mortgage loan. To compare today’s rates, click here.

Can I Make Extra Payments Towards My Fixed Rate Mortgage Loan?

Yes, a homeowner who currently has a fixed rate mortgage loan can make extra payments towards their mortgage. Making extra payments on your fixed rate mortgage loan could help you to save on interest costs and shorten the length of your mortgage.  It is important to note that depending on the type of loan and contract, if a borrower repays more than 20% of their total mortgage balance in one year, they may receive a prepayment penalty. FHA, VA and USDA mortgage loans are exempt from prepayment penalties. Check with your lender to discuss the terms of your mortgage loan as they pertain to prepayment penalties.

What Happens After My Fixed Rate Mortgage Term Ends?

As a homeowner with a fixed rate mortgage loan, you will likely make monthly mortgage payments based on your loan's amortization schedule. Your fixed rate mortgage secures an unchanged interest rate on your loan for a predetermined length of time, typically 15, 20 or 30 years. If the fixed rate term on your mortgage loan is about to end, you can choose to remortgage the remainder of what you owe or automatically be switched to your lender’s standard variable rate, or SVR until the loan is fully paid off. An SVR is not fixed and may go up or down according to changes in major mortgage indicators such as the prime index. If you are concerned that paying a SVR will be most costly to you, it is recommended to connect with you loan originator 14 to 16 weeks before your loan term expires to discuss new loan options.