Five Year Fixed Rate Mortgages Explained

A five-year fixed-rate mortgage 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.

What is a 5 Year Fixed-Rate Mortgage?

This type of loan should not be confused with a hybrid ARM program or adjustable-rate mortgage. Other types of mortgages offering a five year fixed rate include interest-only mortgages, changeable rate mortgages, balloon payment mortgages, graduated payment mortgages, and more. 

Note that in other countries, this type of mortgage may also be referred to as a hybrid changeable rate mortgage.

Except for a direct changeable rate mortgage, the mortgage rate remains fixed for a specific period. With a balloon payment mortgage, for example, the interest rate can remain fixed throughout the loan term, and then require a full principal payment.

Note also that payments made during the fixed-rate mortgage 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 explored by business owners whereas home buyers obtain residential mortgages.

In the case of commercial mortgages, borrowers can be partnerships, an incorporated business, or a limited liability company. That's why determining credit-worthiness 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 a 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. 

Second, any mortgage structured to be sold as a bond requires that the lender is given higher priority status concerning repayment should bankruptcy occur.
The payoff schedule for a five-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.

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.