Should you always get a fixed-rate mortgage?
There's no right or wrong answer about a fixed-rate and
Fixing your mortgage for a set period means that you can ensure a large degree of financial stability. But going with a variable rate or tracker mortgage can mean your monthly outgoings may drop when interest rates come down. Read our guide to find out which is best for you.
If interest rates are on the rise, it may be a good time to switch to a fixed rate mortgage. With a fixed rate mortgage, your interest rate will remain the same for the entire loan term, even if interest rates continue to rise.
A potential downside to fixed-rate mortgages is that when interest rates are high, qualifying for a loan can be more difficult because the payments are typically higher than for a comparable ARM. If broader interest rates decline, the interest rate on a fixed-rate mortgage will not decline.
Adjustable-rate mortgages offer an alternative to today's soaring fixed mortgage rates, so for homebuyers on a tight budget, they may be the best option. Not only can they reduce your monthly payment for that initial introductory rate period, but they can save you lots in interest, too.
The main benefit of variable rate mortgages is that if interest rates fall, you could end up paying considerably less for your mortgage than you would if you'd opted for a fixed rate deal.
Fixed-rate mortgages might be best for:
You won't ever need to worry about increases to your monthly principal and interest payment, and you'll have the option to refinance in the future if rates come down.
While it's difficult to predict how interest rates will change, in December 2023, the Fed predicted it would lower the federal funds rate to 4.6% by the end of 2024.
To summarize, the author of the study suggests that variable rates are the better choice much of the time, but locking into a fixed-rate mortgage at the right time can result in mortgage rate savings.
The answer is yes — you can negotiate better mortgage rates and other fees with banks and mortgage lenders, if you're willing to haggle and know what fees to focus on.
What is not a benefit of a fixed interest rate?
You have less freedom – The fixed rate will not give you as much choice as the variable-rate can offer. You are locked to the rate you took until the end of the term. That means you cannot speed up your payment because you need to meet the cap you committed to set.
| Fixed-rate mortgage pros | Fixed-rate mortgage cons |
|---|---|
| Easy to budget for (monthly payments are always the same) | Higher monthly payments |
| No prepayment penalties | May be harder to qualify for |
| Good for long-term homeowners | May not be as good for short-term homeowners |
In general, if a lender expects the cash rate to rise, the fixed rate will usually be higher than the variable rate; on the other hand, if the expectation is for the cash rate to fall, the fixed rate will tend to be lower than the current variable rate.
The part of your fixed-rate mortgage payment that changes annually is your escrow. Each year, the financial institution that holds your mortgage estimates how much you'll pay in property taxes and home insurance. If your home value has risen since the prior year, the cost of your taxes and insurance will also increase.
The pros and cons of choosing an ARM mortgage
Monthly payments can decrease if market rates fall—as some predict in 2024, as shown above—or they may increase if rates rise after the initial fixed period. ARMs are complex, requiring careful planning for rate adjustments and potential payment increases.
If you're no fan of surprises and enjoy predictable payments, a fixed-rate mortgage may make sense for you. We'll explore everything you need to know about fixed-rate mortgages and how they work.
If you have a strong credit score and can afford to make a sizable down payment, a conventional mortgage is the best pick. The 30-year, fixed-rate option is the most popular choice for homebuyers. Compare conventional loan rates.
You can choose to lock in your mortgage rate from the moment you select a mortgage, up to five days before closing. Locking in early can help you get what you were budgeting for from the start. As long as you close before your rate lock expires, any increase in rates won't affect you.
Pros of variable rate mortgages can include lower initial payments than a fixed-rate loan, and lower payments if interest rates drop. The downsides are that the mortgage payments can increase if interest rates rise.
Be advised as well: Refinancing or breaking a fixed-rate mortgage to switch to a new loan product also comes with additional costs attached, just as when applying for a first mortgage. Doing so means having to go through a background and credit check and having to pay appraisal, inspection and title fees again.
What percentage of US mortgages are fixed-rate?
| Type of mortgage | Marketshare | Originations (Dollar volume) |
|---|---|---|
| Source: Home Mortgage Disclosure Act data, 2021 | ||
| 30-year fixed-rate | 70% | $3.91 trillion |
| 15-year fixed-rate | 9% | $486.73 billion |
| 5/1 ARM | 1% | $83.71 billion |
It's possible that rates will one day go back down to 3%, though if current trends hold that's not likely to happen anytime soon.
Here's where three experts predict mortgage rates are heading: Around 6% or below by Q1 2025: "Rates hit 8% towards the end of last year, and right now we are seeing rates closer to 6.875%," says Haymore. "By the first quarter of 2025, mortgage rates could potentially fall below the 6% threshold, or maybe even lower."
Legally, there isn't a limit on how many times you can refinance your home loan. However, mortgage lenders do have a few mortgage refinance requirements you'll need to meet each time you apply for a loan, and some special considerations are important to note if you want a cash-out refinance.
Once you find a rate that is an ideal fit for your budget, lock in the rate as soon as possible. There is no way to predict with certainty whether a rate will go up or down in the weeks or even months it sometimes takes to close your loan.
