5 Years Mortgage Rates

A five year mortgage, sometimes called a 5/1 ARM, is designed to give you much of the stability of payment as you'd get with a 30 year fixed rate mortgage, but also allows you to qualify at and pay at a lower rate of interest for the first five years. There are also 5 year balloon mortgages, which require a full principle payment at the end of 5 years, but generally are not offered by commercial lenders in the current residential housing market.

5 year ARM mortgages, like 1 and 3 year ARMs, are based on various indices, so when the general trend is for upward rates, the teaser rates on adjustable rate mortgages will also rise. Currently rates are low, because the Fed has bought a lot of mortgage backed securities in order to stem inflation. That program is due to end at the end of March 2010. If the Fed extends the program at that time, mortgage rates will remain affordable, otherwise the rates are expected to trend upwards in the second quarter of 2010.

5 year ARM mortgages are most often tied to the 1 year Treasury or the LIBOR (London Inter Bank Rate) but it's possible that any particular ARM could be tied to a different index. These are the most common indices that banks use for mortgage indices:

Treasury Bill (T-Bill)
Constant Maturity Treasury (CMT or TCM)
12-Month Treasury Average (MAT or MTA)
11th District Cost of Funds Index (COFI)
London Inter Bank Offering Rates (LIBOR)
Certificate of Deposit Index (CODI)
Bank Prime Loan (Prime Rate)

The initial rate, called the initial indexed rate, is a fixed percentage amount above the index the loan is based upon at time of origination. This amount added to the index is called the margin. Subsequent payments at time of adjustment will be based on the indexed rate at time of adjustment plus the fixed percentage amount, same as it was calculated for the initial indexed rate, but within whatever payment rate caps are specified by the loan terms. Though you pay that initial indexed rate for the first five years of the life of the loan, the actual indexed rate of the loan can vary. It's important to know how the loan is structured, and how it's amortized during the initial 5 year period.

Payment rate caps on 5/1 ARM mortgages are usually to a maximum of a 2% interest rate increase at time of adjustment, and to a maximum of 5% interest rate increase over the initial indexed rate over the life of the loan, though there are some 5 year mortgages which vary from this standard. Some five year loans have a higher initial adjustment cap, allowing the lender to raise the rate more for the first adjustment than at subsequent adjustments. It's important to know whether the loans you are considering have a higher initial adjustment cap.

In analyzing different 5 year mortgages, you might wonder which index is better. In truth, there are no good or bad indexes, and when compared at macro levels, there aren't huge differences. Each has advantages and disadvantages. One of the things to assess when looking at adjustable rate mortgages is whether we're likely to be in a rising rate market or a declining rate market. A loan tied to a lagging index, such as COFI, is more desirable when rates are rising, since the index rate will lag behind other indicators. During periods of declining rates you're better off with a mortgage tied to a leading index. But due to the long initial period of a 5/1 ARM, this is less important than it would be with a 1 year ARM, since no one can accurately predict where interest rates will be five years from now. With a 5/1 loan, though the index used should be factored in, other factors should hold more weight in the decision of which product to choose. The index does affect the teaser rate offered.