Fixed Rate Mortgage (FRM)

Definition

A fixed rate mortgage is a home loan whereby the interest rate charged the borrower remains fixed over the term of the loan.  Since the interest rate does not vary with a fixed rate mortgage, the monthly payments on the loan remain constant throughout the term of the loan.

Explanation

With a fixed rate mortgage, the borrower knows the rate of interest for the duration of the loan's term.  This behavior is in contrast to the adjustable rate mortgage, whereby the interest rate of the loan is often tied to an index and can change over the term of the loan.

Fixed rate mortgages are also fully amortizing loans, meaning the entire principal is paid back over the life of the loan.  Again, this is in contract with balloon loans and interest-only mortgages.

Fair comparisons between fixed rate mortgages can be made using the annual percentage rate, or APR.  The fixed rate mortgage carries the most risk to the lending institution, since they bear all of the risks and rewards of falling or rising interest rates.  This benefit is passed on to the consumer at a cost.  The interest rate on a fixed rate mortgage is usually higher than balloon mortgages, or adjustable (variable) rate mortgages.

Related Terms

Annual Percentage Rate, balloon mortgage, principal, adjustable rate mortgage