There are many financial considerations you will need to weigh when you are applying for a Phoenix, AZ home loan. One of the many questions you will need to answer is this: Should you get an adjustable rate mortgage (ARM), or should you stick with a fixed interest rate?
What is a Fixed Mortgage Rate?
A fixed interest rate mortgage is one which is predictable. The interest rate at the start of the loan will be the same interest rate at the end of the loan. It will never vary. Every single month, it will be the same.
The most common conventional home loan is a 30-year fixed-rate mortgage. 15-year fixed-rate mortgages are popular as well.
The benefit of a fixed rate mortgage is clear. With it, you never must worry about your interest rates spiraling out of control, as happened to so many homeowners during the recession. You know exactly what you are getting. Assuming your own financial situation remains stable, you should have no problem affording your home both now and in the future.
What is an Adjustable Mortgage Rate?
This may leave you wondering why anyone would ever purchase anything other than a fixed rate mortgage. To answer that question, let’s take a closer look at adjustable rate mortgages.
With an adjustable rate mortgage, your interest rate can change on a regular basis, typically annually. This means that your premiums may go up or down. The interest rates for ARMs are never arbitrary; they are based on financial indices. Often, there are caps on how large the adjustment can be within a certain time (a “periodic cap”). There may also be a lifetime cap.
Usually an adjustable mortgage starts out as a fixed mortgage, but only temporarily. There is an introductory rate which is fixed for a few years, and then the mortgage is set up to convert into an adjustable one.
Here is where the benefit comes in. If you look up fixed and adjustable rate mortgages in Phoenix, you will likely notice that adjustable rate mortgages often have much lower interest rates during the introductory period.
There are some people who swear by ARMs and say that they are always better—and others who think that fixed rate mortgages are the only way to go. Still others think they have a handle on what is going on in the economy and that they can predict how an ARM will unfold.
In truth, you cannot guess what interest rates are going to be like 15 or 30 years in the future. So, you should focus on whether the introductory rate is worth it to you or not.
The key to making that determination is to think about your own plans. Are you likely to be living in Phoenix in 15 or 30 years? If so, a fixed rate mortgage is the smartest move.
That way you do not need to worry about affording your home if the economy goes sour in the future. If there is another recession during the lifetime of your mortgage, you might be able to stay in your home while your neighbors down the street with the ARM find themselves underwater.
But if you are only going to be living in Phoenix for a brief time—perhaps not much longer than the introductory period on an adjustable rate mortgage—an ARM could save you a lot of money. There would be no risk since you plan to sell the home within a few years anyway.
Conclusion: Pick a Fixed or Adjustable Interest Rate Based on Your Situation
Neither a fixed nor adjustable rate mortgage is objectively “better” than the other. The “better” choice is always the one which is a better fit for your situation. Whether you plan to stay in Phoenix for a few years or you intend to put down roots here, B Home can help you evaluate your options and qualify for the most affordable mortgage. Call me at 602-953-6677, and we will set up a consultation.