5 year fixed rate mortgage
So what's the fuss about a 5 year fixed rate mortgage? A lot, especially if you are getting a mortgage soon and are choosing your mortgage term.
By now, you will know that you have two options when choosing a mortgage term. You can opt for an adjustable rate mortgage (where the interest rate differs during the entire life of the loan depending on the economic situation) or a fixed rate mortgage to which the 5 year fixed rate mortgage belongs.
A fixed rate mortgage can however differ in that you can get a 5 year fixed mortgage, a 30-year fixed mortgage or a fixed mortgage with a different period. This means that the interest rate is fixed for the first five or thirty years only and can change after that period.
The old favorite was the 30-year fixed rate mortgage because it provided borrowers security in terms of fixed interest rates despite economic changes. However, the longer the repayment period is, the greater the total amount of interest you will pay albeit at a steady rate every month.
The unstable economy has forced a lot of lenders to veer away from 30-day fixed interest rate mortgages and to favor instead adjustable interest rates or a shorter 5 year fixed rate interest mortgage. The economic situation has even given rise to the 25/30 year mortgage where the interest rate is fixed for the entire loan term but at a higher rate.
So why would a 5-year fixed rate mortgage possibly be right for you? This mortgage term allows a fixed interest rate payment for a 5 year period but after that, the interest rate becomes adjustable. There are lots of choices really for a fixed rate mortgage including fixed interest rate payment from one to 15 years or even more. But after that, the interest rate becomes adjustable.
While a fixed interest rate mortgage is advantageous to the buyer because the amount of interest and the monthly payments are determined and unchanged for the entire fixed period, they do carry higher interest rates. Adjustable rate mortgages on the other hand, carry lower rates and are preferred by those who prefer lower interest despite having to pay varying interest rates every year. However, there is an interest cap which provides that lenders cannot not ask for more than a certain amount.
Despite the higher interest rates on a fixed rate mortgage, more and more borrowers are still opting for this mortgage term. In fact, 71% of all mortgage and remortgage transactions from April to May 2006 were taken under a fixed rate mortgage term.
Apparently, a higher interest rate is not a deterrent to borrowers who want to be assured of a lock-in payment scheme for a certain period. If you do not want to be bothered by the rising interest rates and you are comfortable with the interest rate quoted by your mortgage provider then a fixed rate mortgage may be ideal for you.
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