ABA Family Legal Guide

Buying and Selling a Home

Financing a Home Purchase

Different Types of Loans

What is a fixed-rate loan?

With a fixed-rate loan, the interest rate cannot be increased during the term of the loan, typically fifteen, twenty, or thirty years. Under a fixed-rate loan, buyers can feel more comfortable knowing the exact amount of their monthly loan payments throughout the life of the loan. Although the interest rate does not change, the way in which each payment is divided between principal and interest, the amortization schedule of the loan, changes over the loan period. (The amortization schedule is a table that shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan, including the gradual decrease of the principal until it reaches zero.) At the beginning, most of the payment is applied to the interest owed to the lender. As the loan progresses, more money is applied to the principal, the face amount of the loan. This means that the amount of interest deductible for federal income tax purposes will decline over the life of the loan.

The major difference between a fifteen-year fixed-rate loan, on the one hand, and a thirty-year fixed-rate loan, on the other, is that the borrower will pay higher monthly payments on the shorter-term loan than on the thirty-year loan for the same amount of money. On a shorter loan, however, the buyer pays far less total interest, because he or she is using the money for a shorter period of time.