Fixed Interest Rate

Definition

A fixed interest rate means that on a loan or mortgage the interest rate stays the same throughout the term of the loan or mortgage. 

This is available to people who want predictability in their payments and don’t want their interest rates on their loan or mortgage to fluctuate, making their payments potentially higher than what they expected. 

A fixed interest rate avoids any risk associated with a variable interest rate, where an interest rate can change depending on the prime interest rates unexpectedly.

The type of financial products that can come with fixed interest rates include:

  • Credit cards
  • Adjustable-rate mortgages
  • Private student loans
  • Auto loans

Fixed vs Variable mortgage is that the interest on the fixed mortgage does not change over the mortgage term. The interest rate could potentially be higher but the amount of principal being paid on the mortgage remains stable. A variable mortgage is where the interest rate can fluctuate causing the amount of the principal being paid to also fluctuate.

Fixed Interest Rate kept simple

Fixed interest rates are simply a fixed rate on a loan or mortgage that does not change within the term of the loan. Although a fixed interest rate is usually a higher percentage than a variable interest rate, the risk with a variable mortgage is that the loan can increase should the prime rate also increase meaning the buyer would be paying more for a mortgage than expected. This will not happen with a fixed rate, as fixed rates are predictable in their payments because nothing increases or decreases within the term.

How does Fixed Interest Rate apply to you

If you purchase a home for $300,000 with a 3.9% fixed interest rate the monthly payments would be $1349 per month. It doesn’t matter if the prime rate increases as it will not affect your loan. This means that your payments will stay the same throughout the term of the mortgage. Unlike a variable rate mortgage as it’s possible the interest rate on your mortgage will increase unexpectedly.

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