A loan type where the interest rate remains unchanged for the entirety of the contract despite interest rate changes in the economy.
Fixed-Rate Payment Details
A fixed-rate payment is a kind of loan with a set-in-stone interest rate that cannot change throughout the lifetime of the loan. This type of loan is vastly preferred for long-term loans by most people since it’s easier to calculate and predict future costs and expenses with more accuracy. Interest rates often fluctuate and can sometimes come with unexpected rises in payment. Such unforeseen situations cause a lot of stress and are of grave inconvenience to the borrower; therefore, people turn to a fixed-rate payment to avoid these problematic situations.
Fixed-rate payments often refer to mortgage loans. When a mortgage loan is purchased, a choice is given to the borrower to either get a fixed-rate payment or an adjustable-rate mortgage (known as an ARM) which can vary in rate. When choosing a fixed-rate payment, the investor is given multiple options in rate and time. Usually, the time frame offered is around ten years to even 30.
Auto loans, which are fixed-rate payments for motor vehicles, work essentially the same as with a mortgage loan. A pattern of payments is agreed upon and is paid monthly depending on the size of the loan. Although most prefer fixed-rate payments since the risk of inflation is non-existent, there is also no chance of the interest rate lowering. Both fixed-rate and adjustable-rate payments come with their pros and cons.
There is also a hybrid mortgage plan that involves characteristics of both mortgage deals. The way it works is the loan will remain a fixed-rate payment for only a certain period within the mortgage deal. After the agreed-upon time is over, the payment begins to adjust to reflect the economy’s changes.
Example of Fixed-Rate Payment
Let’s say a newly-wed man is looking for a new home for his family. Since he does not want to risk the economy’s uncertain inflating and fluctuating without warning, he decides to pay a fixed-rate payment on his mortgage. Usually, fixed-rate payment mortgages are purchasable for a time of over 30 years, so this man chooses to do the same. If the overall loan is $200,000 with a $10,000 down payment, then depending on the interest rate, the payment will always remain the same for every month of the mortgage’s life expectancy. If the interest rate was 5% in this specific case, then the man will be paying $1,019.96 each month.
These payments are made towards the interest and the principle of the mortgage. So each month, the interest payment will be going down slowly, while the principal payment will inversely go up the same amount. Even though these figures are constantly changing each month, the actual monthly payment does change. If there was a payment of $1,266.71 each month, and the interest went down $1.24, the principal will go up measurably the same amount, making the total cost remain equally the same.