Whether you are looking to save as much money on interest as possible by taking out a short-term mortgage or you want to have the lowest payments possible, there is a five-year loan that will work for you. Thanks to a great deal of competition in the market, lenders have driven interest rates down, offering you the opportunity to refinance your mortgage for less money than you might expect.
When to Refinance Your Mortgage to a 5 Year Fixed Loan
Like most mortgages, taking out a five year loan involves a major trade off. On the one hand, you get a very low interest rate, but in exchange for this you end up with a much higher payment. For example, while a $300,000 30-year fixed rate mortgage at five percent costs $1,610.46, a five year loan at two percent costs $5,258.33.
With this in mind, the best use of a five-year refinance is to take out an old loan that is nearing the end of its life. For instance, someone who took out a 30 year mortgage for $150,000 23 years ago is probably paying about 9% interest with a monthly payment of $1,207. If they were to refinance their remaining balance of $75,019 into a five year mortgage at 2.5%, the monthly payment would go up a little bit to $1,331, but they would be mortgage-free in five years instead of in seven. This would save them around $21,500 in payments and interest.
How to Find a 5 Year Loan?
Five year loans are relatively rare since most consumers cannot afford their monthly payments. That being said, one good way to find a five year loan is to talk to a bank in your community. These lenders have the flexibility to design custom loan terms. They also typically like to turn money over and will be motivated to make such a short-term mortgage for you. Another way that you can find a five year loan is to work with a mortgage broker that has a number of different lending sources. He or she can match you up with a lender that has the right loan for you.
However you find a five year loan, expect to pay a very low interest rate. While interest rates on 15-year loans are usually discounted 20 to 30 percent below rates on the benchmark 30-year mortgage, five-year refinances should be even more affordable. A good rule of thumb is to look for an interest rate that is half of what you would be paying on a 30-year loan. However, you might even be able to do better than this depending on your situation and on market conditions.
Are there Alternatives to the 5 Year Loan?
Don’t despair if you can’t find a five year loan for your home. You can always make your own five year loan. To do this, take out a longer-term loan and pay extra every month. You will end up paying a little bit more interest doing this since your mortgage will be at the higher rate of a longer-term loan but you will still get the benefit of paying off your loan more quickly. If you choose to go this route, remember these three important things:
- Make sure that your loan has no prepayment penalties.
- Have your lender calculate the payments for you so that you know how much to pay every month. They should be very happy to do this for you since it is usually in their interest to have you pay your loan off more quickly.
- Let your lender know that you want the extra money that you pay applied to the principal of your loan. Doing this might be a matter of checking boxes when you make your payment, making an election when you first take out your loan or calling your lender every month. Talk to your lender to find out how to accomplish this with your specific mortgage refinance.
The 5/1 ARM – The Other 5 Year Fixed Mortgage
Instead of increasing your payments to get rid of your mortgage much quickly, you might want a short-term fixed rate loan. The 5/1 ARM is an adjustable rate mortgage which has yearly rate adjustments but carries a fixed rate for its first five years. 5/1 ARM loans usually carry significantly lower interest rates than 30-year fixed loans giving them a lower monthly payment. With their lower payment, you might also find it easier to qualify for them.
Before rushing out to refinance your mortgage to a 5/1 ARM, you should be aware that they have one significant downside. After five years, their interest rate will adjust and could very well go up. Because of this, you should only take out a 5/1 five year fixed ARM if you know that you will be selling the house, refinancing the loan, or making a lot more money before the five year fixed rate period expires.
Today’s excellent mortgage rates make it a great time to refinance into a five-year loan. Given that interest rates are more likely to go up than down in the future, you should get in touch with a lender or mortgage broker to get started on your new refinance as soon as possible.