How a Fixed Rate Mortgage Works

How a Fixed Rate Mortgage Works

Michael Jensen, Mortgage and Finance Guru
By , Mortgage and Finance Guru
Edited by Harry Jensen
Rate Mortgage Overview

Fixed rate mortgages are the most popular type of loan because they offer the borrower certainty over the life of the mortgage.  As the name indicates, the mortgage rate and monthly payments for a fixed rate mortgage are set and do not change over the life of the loan.  This means the borrower does not have to worry about an increase in interest rates and corresponding increase in monthly payment.  Your mortgage rate and payment in the first month of the loan are the same as your rate and payment in the final monthly of the loan.

Fixed rate mortgages amortize over the term of the mortgage which means that with your final monthly mortgage payment, the loan is paid-off in full, with interest.  Because of the way amortization works, a fixed rate mortgage has a constant payment over the life of the loan, but the split between interest and principal payments changes a little every month. An amortization formula determines how much of your payment goes toward paying the lender interest and how much of your payment goes toward paying down your principal loan balance.

At the beginning of the mortgage, the majority of your monthly payment goes to paying interest as opposed to reducing your principal balance. For a 30 year fixed rate loan, it takes approximately nineteen to twenty three years to pay down half of the loan, depending on the mortgage rate. The higher the mortgage rate, the longer it takes to pay down the mortgage balance.

Important Fixed Rate Mortgage Terms

The beauty of a fixed rate mortgage is its simplicity -- in order to evaluate a fixed rate mortgage you only need to understand two key concepts: mortgage rate and term.  The mortgage rate is the fee you pay to the lender for borrowing the money and term is the length of the loan.  The table below outlines these key concepts for a fixed rate mortgage.

Interest Rate
  • The interest rate that you pay on your mortgage
  • For fixed rate mortgages, the interest rate will not change over the life of the mortgage
  • Indicates the length of the mortgage, presented in years
  • A 30 year fixed rate mortgage has a term of 30 year
  • A fixed rate mortgage has equal monthly mortgage payments over the term of the mortgage
  • A 30 year fixed rate mortgage has 360 equal monthly mortgage payments (12 payments per year * 30 years = 360 total monthly payments)
Fixed Rate Mortgage Rates

The interest rate you pay on a fixed rate mortgage depends on several factors including your credit score, loan-to-value (LTV) ratio, loan term and mortgage type. Additionally, fixed rate mortgage rates tend to be higher than the initial interest rate for an adjustable rate mortgage (ARM) or interest only loan. Fixed rate mortgages are provided by traditional lenders such as banks, mortgage banks, mortgage brokers and credit unions.  Shop multiple lenders in the table below to find the fixed rate mortgage with the lowest rate and fees.

Current Mortgage Rates in Ashburn, Virginia as of June 19, 2024
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Rate data provided by RateUpdate.com. Displayed by ICB, a division of Mortgage Research Center, NMLS #1907, Equal Housing Opportunity. Payments do not include taxes, insurance premiums or private mortgage insurance if applicable. Actual payments will be greater with taxes and insurance included. Read through our lender table disclaimer for more information on rates and product details.
Fixed Rate Mortgage Term

Lenders typically offer fixed rate mortgages with 10, 15, 20, 25 and 30 year terms, with the 30 year term being the most popular.  The shorter the term, the lower the mortgage rate but the higher the monthly mortgage payment because the principal amount of the mortgage is amortized, or paid back, over a shorter period of time.  Although you pay a higher monthly payment with a shorter mortgage term, you minimize the total amount of interest you pay over the life of the loan.  In other words, the shorter the mortgage term, the less interest you pay to the bank for borrowing the money.  We review mortgage term and total interest expense in detail below.

The charts below demonstrate how the mortgage rate and monthly payment change depending on the term of the mortgage.  The first chart illustrates the longer the term, the higher the interest rate while the second chart illustrates the longer the term, the lower the monthly mortgage payment.

Interest Rate for a $380,000 Fixed Rate Mortgage
10 Years2.625%
15 Years2.750%
20 Years3.250%
25 Years3.500%
30 Years3.650%
40 Years4.125%
Mortgage Term
Monthly Mortgage Payment for a $380,000 Fixed Rate Mortgage
10 Years$3,604
15 Years$2,570
20 Years$2,155
25 Years$1,902
30 Years$1,760
40 Years$1,618
Mortgage Term

Use our free mortgage quote form to review fixed rate mortgage proposals from leading lenders.  Comparing lenders and loan quotes is the best way to save money on your mortgage.  Our quote feature is easy-to-use and no obligation.

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Total Interest Expense For a Fixed Rate Mortgage

The amount of total interest expense you pay over the life of the mortgage is directly related to the length of the mortgage.  The longer the mortgage term, the more you pay in total interest expense.  So even though a mortgage with a shorter term has a higher monthly payment than a mortgage with a longer term, you end up paying much less in total interest expense with a mortgage that has a shorter term.

The chart below compares the monthly mortgage payment and total interest expense over the life of the mortgage for $400,000 fixed rate mortgages with a 4.00% mortgage rate and 10, 15, 20, 25, 30 and 40 year terms.  As demonstrated by the chart, the shorter the mortgage term, the higher the monthly payment but the lower the total interest expense over the life of the loan.  Selecting a shorter mortgage term can save you tens of thousands and even hundreds of thousands of dollars in interest expense over your mortgage. That means less money for the lender and more money for you.

Total Interest Expense Comparison
Total Interest ExpenseMonthly Mortgage Payment
$4,05010 Years$85,977
$2,95915 Years$132,575
$2,42420 Years$181,741
$2,11125 Years$233,405
$1,91030 Years$287,478
$1,67240 Years$402,440
Mortgage Term

One creative way to think about mortgage term is to get a loan with a longer term but make the same payment that you would with a shorter term mortgage, so a higher mortgage payment than what is required.  For example, you get a 30 year mortgage but make the same, higher payment that you would with a 15 year loan.  That way you maintain the flexibility of having a lower required monthly payment that goes along with a longer mortgage term (in case you cannot afford to make the higher payment at some point in the future), but you pay off your mortgage faster and potentially save a significant amount of money in lower interest expense.

Watch our video tutorial below to understand how a fixed rate mortgage works

FREEandCLEAR Mortgage Instructional Video

Fixed Rate Mortgage Overview Instructional Video

Related FREEandCLEAR Resources


"Fixed-rate Mortgages."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.

About the author
Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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