how a fixed rate payment works
a fixed rate payment agreement is most often used in mortgage loans homebuyers generally have a choice of fixed rate mortgage loans or adjustable rate arm mortgage loans adjustable rate mortgage loans are also known as floating rate loans homebuyers typically can decide which loan type is the better choice for them a bank will generally offer a variety of fixed rate payment mortgage loans each with a slightly different interest rate typically a homebuyer can choose a 15 year term or a 30 year term 2 slightly lower rates are offered for veterans and for federal housing authority fha loans although loans for veterans and those available through the fha have lower interest rates borrowers are typically required to purchase additional mortgage insurance to protect against default 3 banks also offer options for adjustable rate loans historically these could have a substantially lower starting interest rate than fixed rate payment loans in times when interest rates were low the homebuyer could usually get an even lower introductory rate on an adjustable rate mortgage offering a break on the payments in the months immediately after the purchase when the introductory period ended the bank raised the rate and the payment amounts as interest rates were rising when interest rates were high a bank was more inclined to offer the introductory rate break on fixed rate loans because it anticipated that rates on new loans will go lower however with mortgage rates hovering below 5 since the 2008 housing crisis the gap between fixed rate and variable rate loans has practically closed as of aug 13 2020 the average interest rate nationwide on a 30 year fixed mortgage was 2 96 the rate for a comparable adjustable rate loan was 2 9 4 the latter is a so called 5 1 arm meaning the rate remains fixed for at least five years after five years it may be adjusted upward annually 5 the difference between the average interest rate for a 30 year fixed rate mortgage and the average rate for a 30 year adjustable rate mortgagespecial considerationsthe amount paid for a fixed rate payment loan remains the same month after month but the proportions that go to pay off principal and interest change every month the earliest payments are made up of more interest than principal month by month the amount of interest paid declines gradually while the principal paid increases this is called loan amortization 6 the term is used in the home loan industry to refer to payments under a fixed rate mortgage which are indexed on a common amortization chart for example the first few lines of an amortization schedule for a 250 000 30 year fixed rate mortgage with a 4 5 interest rate look like the table below note that the interest payment goes down from month to month albeit slowly while the principal payment increases slightly the overall loan balance goes down however the monthly payment of 1 266 71 remains the same 