As mortgage rates remain at all-time lows and housing prices begin to rebound, homeowners continue to refinance at record rates—including those who have already refinanced in the past couple of years. A trend emerging among the trend, however, is the 5-year-fixed mortgage.
Shorter mortgages offer buyers larger monthly payments, but also save them life-of-loan interest easily totaling six-digit figures. Traditionally, a home buyer looking to pay less overall interest might opt for a 15-year mortgage. Few people would have imagined paying a loan for something as costly as a home in as few as five years. But now that mortgages are available at rock-bottom rates—as low as 2.5 percent for a 5-year term—loans in excess of $130,000 can be repaid in five years for less than $2,000 a month.
The unconventional mortgage may not be one most large banks and mortgage companies—made timid by close regulatory scrutiny the past several years—are willing to sign off on. But not-for-profit credit unions—which had a much lower deficiency ratio during the housing crisis and are less scrutinized—tend to be more inventive in their loan scenarios.
The five-year-fixed mortgage works well for borrowers in particular scenarios. Homeowners with a solid financial foundation, but within a few years of retirement, may want to eliminate a loan that has 10-years left on it. It’s not the tax write-off it used to be, but the borrower doesn’t have enough liquid funds to pay it off.
Refinancing into a five-year loan can cut the remaining term in half without increasing payments under the original loan. Even if the shorter term increases the payments, many borrowers are choosing the 5-year option. They have reached the ends of their careers and can afford higher payments than when they originally purchased their homes. They can then retire debt free.
“We call it our Goodbye Mortgage because it’s perfect for our baby boomer members who want to get out of debt before they retire,” National Institutes of Health Federal Credit Union President Juli Anne Callis told the United Feature Syndacate’s Lew Sichelman. “‘How can we get out of debt by the time we retire?’ is a constant theme we hear from our members.”
The short-term mortgage appeals to borrower of other generations, as well. Parents who want to pay off the family home before the kids head off to college are choosing it. So are young buyers who see the benefits of unloading debt—young investors who, conservatively, would rather pay off their homes than use extra money toward alternative investments. Callis cited interest among buyers who want to pay off the mortgage on their primary home so they can buy a vacation house.
One of the greatest borrower perks of a 5-year mortgage, however, is receiving an additional percent or more off of the already rock-bottom interest rates. While a borrower with excellent credit might be awarded a 3.5 rate for a 30-year fixed loan, the same buyer might get a 5-year mortgage with a 2.5 rate.
“As long as you are in a position where the higher monthly payment is not going to affect your lifestyle, the Goodbye Mortgage works really well,” Mark Lawson, a NIHFCU loan officer, told Sichelman.
