Fixed interest rates explained: What they are and why they matter

Picking between a fixed or variable interest rate can feel a bit like trying to time the market — everyone wants to make the “right” move. With the Federal Reserve trimming rates twice in late 2025, bringing them to 3.75% to 4.00%, understanding how fixed rates work (and when they make sense) is more important than ever. Let's break down how fixed rates work, when they make sense, and how they compare to variable-rate alternatives.

A fixed interest rate is an interest rate that stays the same for the entire duration of your loan or savings product. When you lock in a fixed rate, your interest percentage doesn't change whether the Federal Reserve raises rates, lowers them, or keeps them steady.

This predictability means your monthly principal and interest payment remains constant, making it easier to budget and plan for the future. You'll know exactly what you owe each month from day one until you pay off the loan.

Fixed rates are commonly available on mortgages, home equity products, personal loans, auto loans, student loans, and certificates of deposit (CDs). Each product type operates slightly differently, but the core principle remains the same: the rate you agree to at signing is the rate you'll have throughout the term.

A fixed rate won’t change once your loan begins, but the rate you start with depends on a few key factors. Lenders consider the overall economy, your credit score, how much you’re borrowing, and how long you’ll take to repay the loan (loan term length).

The Federal Reserve plays a big role in shaping overall interest rates. When it adjusts the federal funds rate — the rate banks charge each other for overnight loans — it creates a ripple effect across the economy. While the Fed doesn’t directly set consumer loan rates, its decisions often influence how much lenders charge borrowers.

Want to learn more about how interest rates work? Read our explainer.

Here's how fixed rates work across major financial products:

Fixed-rate mortgages are the most common type of home loan in the U.S. When you take out a fixed-rate mortgage, your interest rate stays locked for the entire repayment period, whether that's 15, 20, or 30 years. This means if you secure a rate of 6.5% today, you'll still have that 6.5% rate in year 15, even if market rates have climbed to 8% or dropped to 4%. 30-year fixed-rate mortgages currently average around 6.19%.

Your monthly principal and interest payments stay the same over time, making it easier to plan your budget. The only changes you might see come from adjustments to property taxes or homeowners insurance. This predictability is a big plus for homeowners who plan to stay put and want steady, reliable housing costs.

Most personal loans come with fixed interest rates, which helps keep things simple and predictable. You’ll get your money upfront as a lump sum, then pay it back in equal monthly installments over a set period, typically between two and seven years. Since your rate doesn’t change, you’ll know exactly how much interest you’ll pay from day one, making it easier to compare offers and plan your budget.

Average personal loan rates currently sit around 11.57% for two-year loans, though your rate may be higher or lower depending on your credit profile.

Home equity lines of credit (HELOCs) traditionally came with variable rates, but fixed-rate options have become increasingly popular. 

Some lenders, such as Figure, offer both fixed^{1: Navigates to numbered disclaimer} and variable^{2: Navigates to numbered disclaimer} rate structures. This allows qualified borrowers to choose an option that aligns with their financial needs and risk preferences. Figure’s HELOC provides the full amount upfront with the option for a fixed rate, which results in predictable monthly payments from the start. As borrowers repay the balance during the draw period, they can make additional draws — each at a new fixed rate based on current market conditions.

Federal student loans always come with fixed interest rates, which are set each year based on Treasury note yields. Once you take out a federal student loan, that rate stays the same for the life of the loan — no matter how the market moves. Undergraduate loan rates typically hover around 6.39%, with graduate rates near 7.94%.

Private student loans, on the other hand, can come with either fixed or variable rates. That gives borrowers a bit more flexibility, but variable rates can also mean more uncertainty over time.

CDs work differently than loans — instead of borrowing money, you’re the one lending it to the bank. In return, the bank pays you a fixed interest rate for keeping your money there. When you open a CD, you agree to leave your money untouched for a specific term, ranging from three months to five years.

In return for that commitment, the bank pays you a fixed interest rate that's usually higher than a regular savings account. While CD rates have been declining since the Federal Reserve began cutting rates in September 2024, the good news is that any rate you lock in now stays guaranteed until your CD reaches maturity.

Traditional savings accounts typically offer variable interest rates that fluctuate with market conditions. Some banks do offer fixed-rate savings options, but they’re less common. 

Fixed rates can be appealing for their stability, though they come with their own pros and cons depending on your financial goals and what’s happening in the economy.

Benefits of fixed rates:

• Budget certainty: You'll know your exact payment amount for the entire loan term, making financial planning straightforward.

• Protection from rate increases: If market rates rise, you're insulated from higher payments.

• Peace of mind: You won’t be hit with surprises or payment shock as economic conditions shift.

• Easier to comparison shop: Fixed rates make it simpler to evaluate competing loan offers.

Drawbacks of fixed rates:

• Higher rates: Fixed rates tend to be a bit higher than variable rates. You’re essentially paying for the stability of knowing your rate won’t change over time.

• Miss out on rate decreases: If market rates fall significantly, you're locked into your higher rate unless you refinance.

• Prepayment considerations: While most loans allow prepayment, you may miss opportunities to capitalize on lower rates without refinancing costs.

• Less flexibility: Some fixed-rate products have stricter terms than their variable-rate counterparts.

The best choice really comes down to your comfort level with risk, your financial situation, and what you think might happen with interest rates. If you like predictability and plan to keep the loan for a while, a fixed rate could be the way to go. But if you expect rates to drop or you’re planning to pay off the loan fairly quickly, a variable rate might save you some money.

While your fixed rate won't change after you lock it in, several factors determine what rate you'll receive initially:

• Economic indicators: The Federal Reserve’s decisions play a big role in shaping overall interest rates. When the Fed raises or lowers the federal funds rate, lenders usually follow suit by adjusting the fixed rates they offer to borrowers.

• Credit score: Borrowers with higher credit scores typically qualify for lower fixed rates because they represent less risk to lenders. A difference of 50 to 100 points in your credit score might translate to a rate difference of 0.5% to 1.5% or more.

• Loan term: Shorter-term loans generally carry lower interest rates than longer-term loans. A 15-year fixed-rate mortgage, for instance, typically has a lower rate than a 30-year mortgage because the lender's money is at risk for less time.

• Loan amount and down payment: Larger down payments (for mortgages) or smaller loan amounts relative to collateral value often result in better rates, as they reduce the lender's risk.

• Market competition: The competitive landscape among lenders affects rate offerings. When multiple lenders compete for your business, rates may be more favorable.

Fixed rates make the most sense in specific scenarios:

• Rising rate environment: When interest rates are climbing or are expected to go up, locking in a fixed rate can help protect you from higher payments down the road.

• Long-term ownership: If you plan to stay in your home or keep your loan for many years, the stability of a fixed rate often outweighs the short-term savings a variable rate might offer.

• Budget constraints: When your budget is tight and there’s not much room for surprises, a fixed rate can bring welcome stability. With a variable rate, payments could rise unexpectedly if rates increase, which might put extra strain on your finances.

• Low risk tolerance: If payment uncertainty causes stress or if your income is variable, a fixed rate may be worth the extra cost for the peace of mind it provides.

• Major life planning: If you’re juggling other big financial goals, like saving for college, retirement, or starting a business, predictable payments can make it easier to plan ahead with confidence.

For those looking into home equity financing, being able to choose between fixed and variable rates adds flexibility. Some borrowers like the stability of locking in a fixed rate, while others choose a variable rate if they expect to pay off the balance quickly or believe rates will fall.

A fixed interest rate stays the same for your entire loan term, while a variable interest rate (also called an adjustable rate) changes periodically based on market conditions. With a variable rate, your payment may increase or decrease as the rate adjusts, typically tied to an index such as the prime rate or SOFR (Secured Overnight Financing Rate).

Variable rates often start lower than fixed rates, but carry the risk of significant payment increases if rates rise. Fixed rates provide payment stability but may start higher and won't decrease if market rates fall.

Fixed rates aren't inherently good or bad — their value depends on your specific situation and the economic environment. Fixed rates excel at providing predictability and protecting against rising rates, making them valuable for risk-averse borrowers or those on tight budgets.

However, fixed rates may be less ideal if you expect significant rate decreases, plan to pay off your loan quickly, or have the financial flexibility to handle payment fluctuations. The "best" choice varies by individual circumstances and market timing.

A 5% fixed interest rate means you'll pay 5% annual interest on your outstanding loan balance, and that percentage won't change throughout your loan term. On a $100,000 loan at 5% fixed, you'd pay approximately $5,000 in interest during the first year (though the exact amount varies based on your payment schedule and loan structure).

As you make payments and your principal balance decreases, you'll pay less total interest each month, but the rate itself stays at 5%. Your monthly payment of principal and interest remains constant, though the proportion going toward principal increases over time while the interest portion decreases.

Fixed interest rates can bring welcome peace of mind in an unpredictable economy. By locking in your rate from the start, you’ll know exactly what to expect from your monthly payments — no surprises if market rates rise later on.

With the Federal Reserve cutting rates twice in late 2025, now may be a good time for borrowers to secure competitive fixed rates before they potentially climb again. Whether you’re buying a home, consolidating debt, or financing a major expense, understanding how fixed rates work can help you make confident, informed choices that fit your financial goals.

If you’re exploring home equity options, a Figure Home Equity Line of Credit (HELOC) offers the flexibility to choose between fixed^{1: Navigates to numbered disclaimer} and variable^{2: Navigates to numbered disclaimer} rate structures. Depending on your credit and property details, you can select the option that best fits your comfort level, repayment goals, and long-term financial plans.

Check your rate today.