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A five-year mortgage is the shortest loan on offer. The interest rates are incredibly low, but you’ll pay much more each month than you would if you had a longer term. If you can afford the payments, it could be an attractive option.
A five-year mortgage is paid off in only five years. This term is unpopular among homebuyers because of the high monthly payments, making it rare for lenders to offer it.
The most advantageous aspect of a five-year mortgage is the low, fixed interest rate. In a lender’s mind, a borrower is less likely to default on a five-year loan than a 20- or 30-year loan. That’s because borrowers need to meet strict eligibility requirements and be in an excellent financial situation to score a five-year mortgage in the first place.
The rate you’ll pay hinges on several factors, such as your credit score, income, down payment and the purchase price of the home. Since five-year mortgages are so rare, lenders don’t advertise their rates — but you can expect them to be between 1 and 1.5 points lower than that of a longer loan.
A 5/1 ARM is actually a 30-year mortgage with a fixed rate for the first five years. After that, the interest rate can change each year for the rest of the loan period. As a result, you lose the predictability that comes with steady monthly payments — yours may change to match market conditions.
Unlike five-year fixed-rate mortgages, many lenders offer 5/1 ARMs.
A 5-year mortgage offers a few useful benefits for homeowners, including:
Taking out a 5-year mortgage also has its potential pitfalls:
Before debating the pros and cons, you need to figure out if you can get a five-year mortgage. Since the monthly payments are often thousands of dollars more per month, lenders have high standards. The eligibility requirements vary between lenders, but you’ll most likely need an excellent credit score, a low debt-to-income ratio, a larger down payment and proof of cash reserves.
Thanks to these requirements, five-year mortgages are usually only accessible for high-income borrowers who can afford the hefty payments. These mortgages also suit those who want to focus on paying off their home over channeling their money into other investments.
The five-year mortgage is all about extremes: low interest rates and high monthly payments. It’s hard to qualify for, so it’s usually reserved for high-income borrowers who can easily meet lender requirements.
If you’d prefer a more flexible loan, explore your options with our guide to mortgages.
Probably. If you can’t find a five-year fixed rate mortgage, you could take out a longer loan — say 10 or 15 years — and increase your monthly payments to pay it off in five years.
With conventional loans, you can pay as much extra principal per month as you like without penalty. If you have a different kind of loan, read the fine print to make sure there’s no prepayment penalty.
Yes, but it’s a long shot. The strongest borrowers have the most negotiating power with lenders, banks or credit unions. This is because they have excellent credit scores, minimal debt, and more-than-sufficient income to pay off the loan.
Katia Iervasi is a staff writer who hails from Australia and now calls New York home. Her writing and analysis has been featured on sites like Forbes, Best Company and Financial Advisor around the world. Armed with a BA in Communication and a journalistic eye for detail, she navigates insurance and finance topics for Finder, so you can splash your cash smartly (and be a pro when the subject pops up at dinner parties).
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