26
Aug
The pros and cons of taking out a 5 year mortgage.

The pros and cons of taking out a 5 year mortgage.

As a five year mortgage is paid over a significantly shorter time period than a fifteen or twenty year mortgage, the monthly payments will be much higher.  For this reason a lot of people will not be able to afford a five year mortgage.  For some people and situations however, a five year mortgage can provide some fantastic savings and a great interest rate.

We have broken down the pros and cons of a 5 year mortgage below.  As every circumstance is different, getting in touch with a lender today will go a long way to identifying if this product is for you.                                   

A shorter term means higher monthly payments.

In essence this is due to having to pay the same amount of money for a property over a much shorter amount of time.  If you were to spread the same payment out over a 20 or 30 year period, then the payments would be significantly less. Although you would be paying interest for a longer period of time so each situation would need to be analyzed in detail before a determination could be made as to whether this falls into the pro or con column.  As the monthly payments are higher, the lender will of course require a much higher income from the customer as well as a solid credit rating to approve the mortgage.

Typically, when looking at interest rates for mortgages, the shorter the term, the lower the interest rates. This aspect of 5 year mortgages is probably the most significant.  It really comes down to a question of affordability.  The difference between a 5 and 20 year mortgage could be as significant as 1 or more percent.


The total amount paid is a lot less!

Throughout the life of a 5 year loan you will pay a significantly smaller amount compared to a 15, 20 or 30 year mortgage.  This is due to the interest rate being smaller, but also the amount of time that you are paying of the principle against the interest. 


Should I get a 5 year mortgage?

If you can afford to make the payment on such a short term then this is clearly a fantastic choice of mortgage product for you.  This can take the form of a mortgage refinancing, or if you are looking to accrue equity quickly over a shorter period of time and spend less on lifestyle improvements and focus solely on your property.


Why should I steer clear of a 5 year mortgage?


The counter argument to the many advantages of a 5 year mortgage is that if you have a longer term mortgage and ultimately smaller monthly payments, you will free up additional funds to invest elsewhere.  This strategy certainly has it’s benefits, however, in order to make the right choice you need to examine exactly how much you can invest and what conservative return you can expect.  To make this calculation you will need to take a lot of factors into account.  When making this determination, you must consider that very few investments come with the same guarantees and certainty that equity will provide.

As with any financial decision of this magnitude, it is always best to consult with a professional who can assess your unique needs and situation before offering an opinion on which length of mortgage term is best for you.  Taking the time to fully understand what you can save by opting for a 5 year mortgage can make a very significant impact on your future.

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