You can create your own 5-year fixed mortgage and own your home outright in 5 years.
People in a hurry to pay off their mortgages might find that getting a shorter-term loan helps them get to their goal quickly. When it comes to fixed mortgages that are shorter in time to pay off, borrowers also see an incredible savings in interest over the time of the loan.
However, the shorter the mortgage term, the larger the monthly payments will be. Ten, 15, 20 and 30 year fixed mortgages are the most common. What if someone wanted to get a 5-year fixed mortgage?
“I don’t know anyone who sells them,” says Chris Thomas, loan originator at America’s Mortgage LLC in Wheat Ridge, Colo.
You might be able to find a 5-year fixed refinance loan somewhere. But they are rare since most consumers could not afford or qualify for those payments. Local banks in your community might be able to help you since they have more flexibility and power to customize loan terms. Mortgage brokers who work with many different lending sources might also be able to find the right loan out there for you.
Create Your Own 5-year Fixed Mortgage
If you can’t find a five-year fixed loan, you do have the opportunity to take out a longer-term loan and just pay more each month to get the mortgage paid off early.
For instance, if you take out a 15-year fixed loan for $200,000 at 3.25%, your monthly principal and interest payment would be $1,405. But if you wanted to pay off that loan in five years, you would add $2,211 to your payment for a total of $3,616 per month. Conventional loans allow you to pay as much extra principal per month as you want without penalty. The end result is essentially a 5-year fixed rate mortgage.
Other Ultra Short Loan Terms
Quicken Loans offers 8-year fixed rate mortgages through its YOURgageSM program that allows borrowers to choose any loan term from eight to 30 years. The 8-year terms was the lowest fixed rate term that was found during an online search.
Quicken explains that if a borrower takes out a $200,000 mortgage on an 8-year fixed rate loan at 2.99 percent and 70 percent loan-to-value (LTV), the payments would be $2,345 monthly with 1.875 points due at closing. When you compare that to a 30-year fixed loan at 4.123 percent and comparable 70 percent LTV, the cost would be $969 with 1.75 points due at closing.*
The Other Kind of 5-Year Mortgage: The Adjustable Rate (ARM)
Most lenders do offer 5-year Adjustable Rate Mortgages (ARMs). The rate is fixed for five years, but then it can go up if you are not done paying off the loan by then. With those, borrowers become vulnerable to potential increase in rates – and sometimes large increase depending on the terms and the rules behind ARMs.
“We try to talk everyone out of getting ARMs right now because the index — which used to determine the interest rate after it changed — is based on short-term interest rates (London Interbank Offered Rate [LIBOR] or United States Treasury securities). When inflation kicks in, the rates are going to go up,” he says.
The rates are determined by taking the index (whatever that happens to be when the rate changes) and adding a margin. That is usually 1.75% for Fannie Mae loans, but it could be more, depending on where the loan is going to be sold. The total of those two numbers (index + margin) equals the new interest rate, Thomas states.
For instance, if you take out a 5-year adjustable rate mortgage, the loan has a fixed rate for five years. Let’s say that initial rate is 3%. Fast forward five years. The loan’s margin is 1.75% (which never changes) and the index has risen to 2.5%. The rate would increase from 3% to 4.25%.
Rate Limits on 5-year Adjustable Mortgages
“After the first 5 years is up, the rate can change once a year or once every six months, depending on the loan product. The amount it changes depends on the caps,” he says.
There are three caps for every ARM:
- The first cap tells how much the rate can change the first time it changes.
- The second cap tells how much it can change every time after that.
- The third cap tells how much it can change over the life of the loan (the maximum amount it can change).
As an example, if the caps are 2/2/5, it can change 2% the first year (assuming it only changes once a year), 2% every year after that, and the most it can ever change from the original rate is 5%.
“In my experience, no one ever asks about the index, the margin, or the caps. Most lenders probably don’t even know what those terms mean. People only think about the fact that they can save a little bit of money to start, and that is not the way to think about a loan that is going to last for 30 years,” he adds.
Fannie Mae requires a minimum of 10% down for ARMs, as opposed to only 5% down for fixed-rate loans and only 3% down for first-time home buyers.
5-year ARM Rate Comparison
“The interest rate right now for a 5-year ARM is 1% less than it is for a 30-year fixed mortgage, but that savings can rapidly disappear if the index goes up. People often say they will just refinance if rates go up in 5 years, but they forget that the rate in 5 years might not be as good as it is now, so they may not be able to refi into a lower rate loan,” Thomas says.
Who would be a good candidate for an ARM?
“I would say that the only people who should get one are people who absolutely, positively know that they are going to sell the house before the rate changes. ARMs are designed to go up. The industry term for the initial interest rate is the “teaser rate,” he says. “Lenders are teasing consumers into thinking they are getting a good deal, and they are not.”
Check Mortgage Rates For Short-term Loans
Home buyers and refinancing homeowners can benefit from today’s low rates. Whether you are looking for a short-term fixed rate, or an adjustable rate with an initial fixed period, rates are ultra low.
*Rates as shown on Quicken’s website at the time of writing. Rates may not be currently available.