If you have been looking to get a mortgage, you might have heard terms that you don’t understand. The world of mortgages is pretty complex, with many different products for different needs, credit scores, and circumstances. Let’s go over two of the most common mortgage loans, the adjustable and fixed rate mortgages for Arizona homeowners. We used real world examples to best demonstrate the concepts.
John and Sarah have two kids and a yellow lab named Boomer. They live in San Diego, California in a small, two bedroom house that they’ve owned for five years. Doug just got his dream job in the Scottsdale area, and the family’s home has sold. They are looking for the home they will settle into for the next 25 years.
John and Sarah have good credit and, between the two of them, make about $185,000 per year. They look at several houses, settling on a $400,000 home near Old Town Scottsdale. This home is perfect for them, it has a nice backyard with big trees, a pool, and four bedrooms for when they have the third child they are planning.
Their mortgage broker presents them with a choice between an adjustable rate mortgage (or ARM) and a fixed rate mortgage. He informs them that the ARM loan will be fixed for five years, then the interest rate will increase slowly over the next 25 years of the loan. It’s a nice option because their initial payments will be low, but they would end up paying more over the life of the loan, if they stayed in their home that long.
The fixed rate mortgage had a higher initial monthly payment, but John and Sarah felt that the payment as within their initial goal, when compared to their take-home income. After considering the home, and knowing it could be their destination home, they chose the fixed rate mortgage.
This was a good choice for them. Their income supported the fixed mortgage payment, and their plan to stick around meant that having increasing interest rates would be more expensive in the long run.
Andrew just graduated from college. He has been living in apartments and dorms for four years, and is looking to move from Tempe to Phoenix to be closer to his new entry level job. He wants to find a place to live that will meet his needs for the next three years, but doesn’t want something too large or expensive. Since it’s just him, he doesn’t need a lot of space. He also wants to buy a home, because his dad told him it was a better use of his money that renting.
Andrew has very little credit, but has been working on his score for a year or so and finally meets the minimum requirements to get a loan. He makes $55,000 a year and has some student loan debt.
After a few months of searching, Andrew has settled on a $220,000 townhome that’s exactly what he was hoping for. It has one bedroom and no yard, but it has a large living room and a common pool, which he thinks will be great for having friends over.
His mortgage broker gives him the same options he gave John and Sarah. Unfortunately, the mortgage payment might be a little steep for Andrew at his current pay level, but the ARM loan includes a payment that’s about $200 less than the fixed rate. This not only makes the payment more affordable, but makes him more likely to qualify at his current income and debt to income ratio.
Since he will be selling the home in the next three to four years, the five year adjustment shouldn’t impact Andrew. And, even if he does decide to stay for longer, his income is only increasing, and having a small increase in his mortgage payment over time might be manageable.
Andrew chooses the ARM loan. This is a good choice for him because he is upwardly mobile, single, and is in a place in life where his circumstances will likely change quickly and repeatedly.
Choosing between an adjustable and fixed rate mortgage for Arizona homeowners isn’t always easy, and your circumstances might not be as cut and dry as our examples. But, the basic factors are your stability, your income, your desired home price, your credit and your future plans. Make this decision after thought and research, and you can always ask your mortgage broker for more information.