There are many reasons why you would consider a 5 year fixed mortgage. This type of mortgage comes with a lower interest rate and the life of loan savings can be tremendous. Additionally, thanks to a great deal of competition in the market, lenders have driven 5 year fixed mortgage rates down, offering you the opportunity to refinance your 5 year home loan may be less money than you might expect.
So, why are these short term loans not as common as 15 or 30 year fixed mortgages?
Briefly, what is a 5 year fixed mortgage rate?
A 5 year fixed rate mortgage is shorter than most traditional mortgage terms and typically comes with larger the monthly payments. If your financial situation allows for securing a five year fixed mortgage, a very favorable interest rates typically accompany this type of loan. These loans can also be secured as ARMs.
Pros of 5 year fixed mortgage rates
There is quite a bit to consider before deciding on a 5 year fixed mortgage refinance. The most appealing part of a 5 year refinance mortgage is the low interest rate. The difference could be 1 percent or more, which can really add up. To think of it simply, the lower your interest rate, the less you pay for your loan overall. Let’s say you have a 5 percent interest rate on a $100,000 30 year fixed rate mortgage. You will pay $537 in monthly payments. Lowering your interest rate by 1 percent will mean monthly payments of only $477 a sizeable difference.
Life of loan savings
Over the life of the loan, the savings for a five year loan are great. That $100,000 mortgage at 5 percent would cost you a total of $193,256 in principal and interest if you took 30 years to pay it. That’s nearly double the original home cost. Paid over 15 years the total cost would add up to $142,343 If you paid it off in five years, the total cost would be $113,227.40, not that much more than the original loan amount.
Cons of 5 year fixed mortgage rates
Monthly payments with a five year mortgage are larger than for the same loan amount spread out over a longer period of time. If you had a loan for $100,000 at 5 percent, each monthly payment would be about $1887.12. The same loan spread out over a 15 year term would have monthly payments of $790.79, and over a 30 year term, you’d pay just $536.82 each month. As you can see, the payments more than double between a 5 year fixed rate and a 30 year fixed rate in this scenario.
Most often, the longer the loan, the more interest paid. (Photo/Megan Wells)
When considering if 5 year fixed mortgage rates today is right for you, you’ll need to determine whether or not you can afford a larger payment.
Who should get a 5 year fixed mortgage?
Your old loan is running out
Typically the best time to get a 5 year refinance is when an old loan is nearing the end of its life refinancing to a shorter term is a great option. For example, someone who took out a 30 year mortgage for $150,000 23 years ago is probably paying about 9 percent interest with a monthly payment of $1,207.
If that person refinanced their remaining balance of $75,019 into a five year mortgage at 2.5 percent, the monthly payment would go up a little (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.
Your financial situation supports the increased payments.
A 5 year loan is relatively rare since most consumers cannot afford its hefty monthly payments. Most lenders will require proof of income that will qualify you to make larger payments before offering this type of loan.
Where can you get the best 5 year mortgage rates from?
Credit unions, regional, and community banks all typically offer a 5 year refinance mortgage rates. Their current specials and promotions will vary, so shopping around and speaking with multiple lenders is always a good idea.
With that in mind, starting with your community bank could prove fruitful. These lenders have the flexibility to design custom 5 year loan rate terms.
Another way that you can find 5 yr mortgage rates 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 and will require less legwork from you.
How to gauge if the 5 year fixed mortgage is a fair rate?
There is always a risk, with a fixed rate mortgage that you’ll incur a higher interest rate than the market speculates. Though a short term loan can limit the amount of marketplace volatility you experience, have you researched the current interest rate forecast? Does it make sense to act now, or wait, before securing a loan?
The primary perk of a 5 year fixed rate mortgage is the low interest rate. How far below the benchmark can you get? While interest rates on 15 year loans are usually discounted 20 to 30 percent below rates on the benchmark 30 year mortgage, 5 year refinance rates 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. It is possible to land a lower rate depending on your personal finance situation and on market conditions.
Other uses for a shorter term loan
You can make your 5 year fixed mortgage a refinance option. 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 with a 5 year mortgage calculator so that you know how much to pay every month.
- Let your lender know that you want the extra money that you pay applied to the principal of your loan. Talk to your lender to find out how to accomplish this with your specific mortgage refinance.
The 5/1 Arm. A 5/1 arm secures a fixed rate for 5 years, then becomes adjustable. Instead of increasing your payments to get rid of your mortgage much quickly as you would with a 5 year fixed mortgage, you can consider this as a short term fixed rate loan.
The 5/1 ARM is set at a fixed rate for its first five years, then will adjust annually after the initial fixed period. 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.
One thing to note, after five years, the interest rate on a 5/1 ARM will adjust and could increase drastically. For this reason, a 5/1 five year fixed ARM is best if you have a short-term plan in place. For instance, if you plan to move out of your home, or if you plan to refinance in the near future – something that can get you into a lower rate once the fixed period of time is up.
If you’re prone to money mismanagement, it’s better to consider one of the alternate options, or paying your mortgage down straight up.
The Mortgage Bankers Association predicts that the 30 year fixed mortgage will rise gradually over 2017, averaging 4.7 percent in the fourth quarter of 2017. Similarly, the National Association of Realtors expects the 30 year fixed to be around 4.6 percent at the end of this year. So depending on your current interest rate, considering refinancing may be in your best interest. 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.
A disciplined investor is a great candidate for a 5 year fixed mortgage refinance strategy. Do your homework to determine if a 5 year mortgage is perfect for you.