First instituted by the Federal Housing Administration, a fixed rate mortgage is a form of home loan where the interest rate does not fluctuate for a specified period of time, typically from 10 to 50 years. This is opposed to adjustable rate mortgages, which lenders adapt according to a market index that reflects the cost of making the loan to the lender itself. Loans that have a fixed rate for only part of their life are called hybrid adjustable mortgages. In the United Stats, fixed rate mortgages are the most popular form of home loan. Payments are first made towards interest, and then toward the principle.

There are many features that attract home buyers to fixed rate mortgages. In particular, borrowers like the security of knowing precisely what the monthly payments will be, and what the mortgage will ultimately cost if the loan covers the life of the repayment process. A borrower of an adjustable rate mortgage does not have this comfort, as rates can unexpectedly reach unaffordable heights.

Additionally, in fixed rate mortgages there is the option to make early payments toward the principle without penalty. Doing this will reduce the cost and duration of the total loan. For instance, for a 30 year fixed rate mortgage, one additional payment a year can reduce the amortization period by eight years. Making payments every two weeks can reduce the amortization period by eight years. Fixed rate mortgages have been especially popular in the past few years, due to considerably low interest rates that range from the high four to the low six percent rage.

The risk borrowers take when settling for a fixed rate mortgage is that general interest rates may drop at some point during the life of the mortgage. This would result in having to pay above-market interest rates. Some borrowers in this situation resign to refinancing.

Another downside of fixed rate mortgages is that they may be more difficult to obtain for individuals with less then outstanding credit. This is not always the case, but such borrowers may be forced go with a different option, like the balloon payment mortgage. This form of mortgage usually has an affordable rate but requires the borrower to make a large lump-sum payment at a designated time, typically after 15 years. In most cases however, people either sell their home or refinance their mortgage before this period arrives.

The fixed rate mortgage is generally the best route for potential home buyers, especially first-timers. The security of this form of loan outweighs the potential risks. If, however, the interest rates are exceptionally low at the time of your purchase, you might want to consider an adjustable rate loan. Consider this and other factors when making this all-important decision.