Fixed-rate mortgage
A home loan whose interest rate stays the same for the entire term, so the principal-and-interest payment never changes. It shields the borrower from rising rates but will not fall if rates drop.
Key Takeaways
- A fixed-rate mortgage carries one interest rate for the whole term, so the principal and interest portion of the payment never changes.
- A fixed-rate loan has no index and no margin, because nothing about the rate is tied to a market benchmark.
- The total payment can still move when property taxes or hazard insurance held in escrow change, since only principal and interest are fixed.
- A fixed rate protects the borrower if market rates rise and gives no benefit if they fall, so the only way to capture a lower rate is a new loan.
What It Means
A fixed-rate mortgage locks one interest rate into the promissory note and keeps it there for the entire term. Nothing about the rate is tied to a market benchmark, so there is no index to follow, no margin to add, and no adjustment date to watch. The principal and interest payment computed at closing is the same payment the borrower makes in year one and in year thirty.
What does change is the split inside that payment. A fixed-rate loan still amortizes, so the early payments are mostly interest and the later ones are mostly principal even though the total stays level. A borrower watching the interest share shrink each year is watching Amortization work, not a rate change.
The certainty cuts both ways. A borrower who locks 6.25 percent is protected when market rates climb to 9 percent, and is still at 6.25 percent when they fall to 4 percent. Capturing the lower rate then takes a brand new loan with a brand new set of closing costs. That trade-off, payment certainty against the chance of a lower rate later, is the whole comparison against an Adjustable Rate Mortgage Arm.
How It Works in Washington
In Washington a fixed-rate home loan is almost always secured by a Deed Of Trust rather than a true mortgage. RCW 61.24.020 provides that a deed conveying real property to a trustee in trust to secure the performance of an obligation of the grantor to the beneficiary may be foreclosed by trustee’s sale, and that the county auditor records the deed as a mortgage. Locking the rate does not soften that remedy. A fixed rate settles what the borrower owes each month, not what happens if the borrower stops paying.
Two Washington rules land on the closing itself. RCW 19.144.020 requires a financial institution to give the borrower a plain-language disclosure summary of all material terms within three business days after receiving the loan application, covering the interest rate, the fees and discount points, whether the loan contains a balloon payment, and whether taxes and insurance are held in Escrow. RCW 61.24.157 then adds a foreclosure prevention fee of $80 on each residential mortgage loan related to Washington property, assessed at closing by the closing agent and paid into the foreclosure fairness account.
Example
Dana buys a house in Spokane for $450,000 and puts $90,000 down, which is 20 percent. She borrows $360,000 on a 30-year fixed-rate mortgage at 6.25 percent, and her principal and interest payment is $2,216.58 a month.
Her first payment splits into $1,875.00 of interest ($360,000 times 6.25 percent, divided by 12) and $341.58 of principal. Ten years later the payment is still $2,216.58, but the balance has fallen to $303,255.77, so that month only $1,579.46 is interest and $637.12 goes to principal.
Market rates reach 8 percent in year six and Dana’s payment does not move a cent. At closing she also paid the $80 foreclosure prevention fee required by RCW 61.24.157, a one-time charge that was never part of the fixed payment.
Common Mistakes and Exam Traps
- A fixed rate fixes the interest rate, not the whole monthly bill. Escrowed taxes and insurance can still push the amount due higher.
- Index, margin, adjustment period and rate caps belong to adjustable rate loans. A fixed-rate loan has none of them.
- A fixed-rate loan still amortizes, so the interest and principal split changes every single month even though the payment is level.
- A borrower cannot ride a fixed rate down. Falling market rates require refinancing into a new loan, not an adjustment to the existing one.
Where you'll learn this
Frequently Asked Questions
What is the difference between a fixed-rate mortgage and an adjustable rate mortgage?
A fixed-rate loan keeps one interest rate for the entire term. An adjustable rate loan resets periodically to a published index plus a fixed margin, so its payment can rise or fall after each adjustment.
Can the monthly payment on a fixed-rate mortgage ever change?
The principal and interest portion cannot. The total amount collected each month can still change if the lender escrows property taxes and hazard insurance and those costs go up or down.
If market rates drop after closing, can a fixed-rate borrower get the lower rate?
Only by refinancing into a new loan, which means new closing costs. There is no adjustment mechanism inside a fixed-rate note, so the original rate holds until the loan is paid off or replaced.