If you’re like most people buying a home in Scottsdale or the surrounding communities, you’ll need to take out a mortgage loan to finance the purchase. You’ll have several options for financing, which is good news (and interest rates are still low, which is even better news) – but you need to know where to look when you’re searching for the right terms on a loan. You’ll have to choose between a fixed-rate and an adjustable-rate mortgage, for starters… but what’s the difference between the two?
What is a Fixed-Rate Mortgage?
A fixed-rate mortgage is a loan with an interest rate that never changes. If you sign a mortgage agreement with your lender today at an interest rate of 3.5 percent, that’s what your interest rate will be from today until the day your loan is paid off (whether that’s 10, 15 or 30 years from now).
Your mortgage payment will be the same every month – it won’t fluctuate based on current interest rates – and you’ll be able to budget accordingly.
What is an Adjustable-Rate Mortgage?
An adjustable-rate mortgage is a loan with an interest rate that does change based on what’s happening on the market. There’s an initial fixed-rate period (typically 5 to 7 years, but every loan is different) during which your payments stay the same because the interest rate doesn’t change. After that period is over, your interest rate may go up or down. Usually, lenders adjust the interest rate on these types of loans once per year. Your payment will stay the same until your lender readjusts the rate, and at that time, it could go up or down.
How Do You Know Which Type of Loan is Right for You?
Your personal preferences and the flexibility of your budget will determine which type of loan is right for you. There are pros and cons to each type of financing, which means you’ll need to talk to your lender and ask as many questions as you can to ensure you make the right choice.
Pros and Cons of Fixed-Rate Mortgages
- You’ll always know how much your mortgage payment will be so you can budget appropriately
- You won’t have a lower mortgage payment in the future, if rates go down, unless you refinance your home
Pros and Cons of Adjustable-Rate Mortgages
- You could have a lower payment than you expected at some points during the life of your loan, if interest rates go down
- You could have a higher payment than you expected at some points during the life of your loan, if interest rates go up
The bottom line is that your situation is unique, and your mortgage loan should be perfectly tailored to it. It’s a good idea to talk to several lenders to see what they’re each willing to offer you so you can make your own list of pros and cons before you make your decision.
If you’re having a tough time finding a lender that will offer you favorable terms, talk to your Scottsdale real estate agent for a referral. Most agents know several lenders who have helped previous clients, and they’ll be more than happy to help you find one that works for your needs, as well.