First Time Home Buyer: ARM vs Fixed Rate Which Mortgage Is Better When Buying Home in Phoenix AZ?
If you are thinking of buying a home in Phoenix area, chances are you’re debating on whether to get an adjustable-rate mortgage (ARM) and a fixed-rate mortgage. So what’s the difference between them and which one is better?
What is Adjustable Rate Mortgage (ARM)?
An adjustable rate mortgage also known as a variable-rate mortgage, is a loan that starts out at a fixed interest rate and the rate adjusts after a specified initial period. The most popular in today’s market is the 5/1 ARM, followed by the 3/1, 7/1 and 10/1 ARM. A 5/1 ARM means your rate will be fixed for first five years, and then adjusted annually for the rest of the loan term. The “new” rate is based on market conditions. If those indexes go up, your rate will go up hence, payment will go up. However, if the indexes go down, that doesn’t necessarily mean your payments will, too. Be sure to read the fine print on your mortgage.
Lower Interest Rate
An ARM begins with a lower interest rate, at least for as long as the initial rate is fixed. This means your monthly payment will be more affordable. Because of this feature, you might actually qualify for a larger loan. For example, let say you want to buy a $300,000 home. It will probably be easier to qualify for the ARM than a fixed-rate mortgage, because the initial payment is lower and absorbs less of your total income.
Adjustable rate mortgages most often appeal to a younger, more mobile first-time home buyer. If you’re advancing in a career that could potentially require you to move to another city within a few years, are thinking about starting a family soon, or want to simply keep your long-term options open, an ARM could be a good choice. As long as you’re ready to move on before the introductory period ends, you’ll benefit from the advantage of making lower payments while you’re living in the home.
People who get ARMs often think that one of the following events will occur:
- They will sell the home before the loan resets
- Their income will increase before the loan resets
- They’ll be able to refinance before the loan resets
What is Fixed Rate
A fixed-rate mortgage is just that: The interest rate, stay the same for the life of the loan, be it 15, 20, or the most common 30 years.
If you’re a home buyer with a steady career who wants to put down roots in a community, a fixed-rate mortgage might appeal to you. Fixed-rate mortgages provide more long-term stability, and with rates still low, borrowers prefer the security of not risking a rate increase or adjustment if the market were to turn.
Whether a fixed-rate mortgage or an ARM is the best choice is depending on your unique situation. First, you should talk to several lenders to find out what you are qualified for, given your credit score, income, debts, down payment and other factors. It’s far more helpful to know what you’re actually working with than to choose among options that are purely theoretical.
Swee Ng, Realtor and Phoenix East Valley resident specializing in win-win real estate transaction through great communication and fighting for his clients’ best interest. After all, this is more than real estates, this is about your life and your dreams.
If you are looking to buy or sell your home in Phoenix AZ area, we hope you will consider us. Contact us today for complimentary consultation.
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