What is a Fixed Interest Rate?

A fixed interest rate is a type of loan or mortgage for which the rate of interest does not fluctuate over the life of the loan.

How Does a Fixed Interest Rate Work?

The most common types of mortgages carry either a fixed or variable interest rate. While the variable rate can change over time, the fixed rate is set usually as a given amount above the 30 year Treasury bond rate at the time of setting.

The benefit of a fixed interest rate loan or mortgage is the stability of the payment over a period of time. In the case of home mortgages, this is usually a 30-year period. In this scenario, the borrower can budget his payments without worrying what the future interest rate market will be. Most of the initial payments go toward interest on the loan and only a small portion reduces the principal of the loan. As the principal is reduced the corresponding interest charge is reduced, thus enabling more of the payment to reduce the principal. This process takes place for 30 years until the last payment consists entirely of principal and no interest

A disadvantage is that fixed rate interest is usually higher than the variable rate.

Why Does a Fixed Interest Rate Matter?

The choice between fixed and variable rates depends on both personal factors such as the borrower's family and employment status, and market factors such as the interest rate climate.

A borrower may opt for a fixed interest rate if he is concerned that rates will be going up and if he is a more risk-averse investor.

Ask an Expert about Fixed Interest Rate

All of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Fixed Interest Rate.

Be the first to ask a question

If you have a question about Fixed Interest Rate, then please ask Paul.

Ask a question
Paul Tracy
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 3 million monthly readers.

Verified Content You Can Trust
verified   Certified Expertsverified   5,000+ Research Pagesverified   5+ Million Users