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Five Year Fixed Rate Mortgages Explained

04/08/2010

A five year fixed rate mortgage rate offers the best of both worlds: payment stability typical with a longer-term fixed rate mortgage combined with a (usually lower) fixed rate for the first five years. This type of loan is not to be confused with an hybrid ARM program , or adjustable rate mortgage. Other types of mortgages offering a 5 year fixed rate include interest-only mortgages, changeable rate mortgages, balloon payment mortgages, graduated payment mortgages, and more. Note that when dealing with countries other than the U.S., this type of mortgage may also be referred to as a hybrid changeable rate mortgage.
What's common to all of these mortgages is that, with the exception of a direct changeable rate mortgage, the mortgage rate remains fixed for a specific period of time. With a balloon payment mortgage, for example, the interest rate can remain fixed throughout the loan term, and then require a full principle payment.

Note also that payments made during the fixed interest rate period do not take into consideration escrowed payments such as insurance and property taxes. These amounts may change from time to time and impact the amount due. Therefore, only the mortgage payment and the interest remain unchanged.

Commercial mortgages

A commercial mortgage is similar to a residential mortgage with one key difference: commercial property or other business-related real estate is typically used to guarantee the mortgage. Another key difference is the borrower. Commercial mortgages are usually sought by business owners whereas residential mortgages are obtained by homebuyers.

In the case of commercial mortgages, borrowers can be partnerships, an incorporated business, or a limited company. That's why determining creditworthiness is typically a more involved process than it is with residential mortgage applicants. With non-recourse loans, lenders are only able to retake the asset pledged as security in the event of default. If there is a shortage between the asset's value and the amount still owed, the lender cannot make any further claim against the borrower.

There are two main reasons for this. First, the law prevents lenders from taking any further action in regards to collecting the shortage amount. And second, any mortgage structured to be sold as a bond requires that the lender be given higher priority status in terms of repayment should bankruptcy occur.
The payoff schedule for a 5 year fixed mortgage can range from a few days to 10 years or more. Using the balloon mortgage again as an example, a 5/5 balloon mortgage means the term is fixed for the first five years and is fully paid off in 10 years.

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