The Best 5 Year Fixed Rate Mortgages
Home mortgages are primarily available in 15-year and 30-year terms. However, in an effort to better serve their customers, banks frequently offer loans that fall outside of these standard durations. One option offered by banks is a five-year mortgage. This term offers some added protection to the bank as the loan is paid off faster, and some increased flexibility to the home buyer. However, as with any loan product, you should look for features that make it the best possible loan for you.
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Low Interest Rates
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The shorter the term of the loan, the less risk there is for the lender of seeing the loan go into default. A bank should offer you an interest rate that is significantly lower than its 15- or 30-year counterparts to accommodate your willingness to return the principal at a quicker pace. Since you are paying the loan off over 60 installments versus 180 or 360, your monthly principal payments will be high. You need to obtain the lowest possible interest rate available to maximize the benefits to you of this type of loan.
Adjustable Option
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Adjustable-rate mortgages -- or ARMs -- were demonized during the credit and real estate crisis of 2008 and 2009. Five-year ARMs provided for extremely low interest rates -- sometimes 1 percent -- for the first five years of the mortgage, and then reset to higher rates after 60 months elapsed. This resulted in monthly payments skyrocketing for homeowners who were not educated on these types of loans. While you should not be forced into a five-year ARM, you should request the option for the rate to be adjustable. If you can obtain a significantly lower rate by agreeing to this ARM for the first five years and commit to aggressively paying down the principal, you can save yourself a good deal of interest expense over the long haul.
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No Prepayment Penalty
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Banks earn their money on the interest charges assessed. When you take out a mortgage of any amount or length, the bank forecasts how much interest will be earned over the duration of the loan. This amount can be easily calculated or displayed in a loan amortization table. When you make payments early or pay off the loan balance prior to the maturity date, the amount of interest the bank was projected to earn on the loan will be reduced. Some banks will assess prepayment penalties to make up for the lost income resulting from early payments. Ensure that your loan does not carry these fees so you can have the flexibility to pay off the loan in full or add additional principal payments without being penalized.
Partial Loan Amount
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A bank may want your entire loan balance on their books, but you should be able to choose how much you want to borrow for this five-year loan solution. You may consider allocating 50 percent of your loan balance to a 30-year mortgage and the other 50 percent to this five-year plan that carries lower interest rates. Your lender should be able to provide you with this flexibility and should appreciate that having part of your business is better than having none of your business. If you can commit to servicing both of these mortgages, you will build up home equity faster and reduce your overall interest expense.
Competitive Fees
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Since a five-year mortgage is not a standard mortgage offering for many banks, lenders may try to assess specialized fees on these transactions to boost their revenue. Banks are allowed to specify their policy and fee structure, but look for a five-year loan where the fees are really no different from those charged for a standard 30-year mortgage. It may be a tall order, but ideally, you can try to find a loan that has no origination or application fees. However, there is no reason to pay extra fees just so you can have a five-year mortgage.
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References
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