Fixed-Rate Loans

Categories: Bonds, Banking

Loans where the interest rate does not change with time. Even if interest rates overall go up (or down), the interest rate you pay will stay the same. That could be good or bad depending.

Example

Thomas wants to buy a house, and he doesn't want any surprises, so he gets a fixed-rate mortgage. His bank helps him figure out that his 20-year, 5% mortgage will cost him $1,000 a month. On the first month, Thomas pays $1,000. On the 30th month, he pays $1,000. Every month it's the same thing, which sure helps him budget. It might make him feel a little glum, though, if he sees that interest rates have dropped to 3%. He's still stuck paying the same 5%.

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