Fixed Rate

A fixed rate loan has a fixed interest rate for the life of the loan, or a portion of the life of a loan. The interest rate is the price of renting money. There is no such thing as a free lunch, so when you borrow money, you have to pay to use that money loaned to you. Banks accept money from depositors who are paid interest in return for their dough. Banks then they loan out those deposits and charge money for loaning out depositors’ money. Banks earn money by charging borrowers interest at greater rates than they pay depositors for the safekeeping of their dough.

Example:

You borrow $500,000 to buy a home. The bank will look at your credit-worthiness and income to determine risk. If the risk of loan repayment is low, the interest rate charged to the borrower will usually be lower. The more perceived risk in lending, usually, the higher the interest rate will be. So the bank sets your interest rate at 4% for the life of the loan. If the borrower chooses a 30-year loan structure, then the borrower's payments will be the same at a fixed rate for 30 years at about $2,100 per month.

See: Fixed Interest Rate.