5/25 Extendable Mortgage
The 5/25 extendable mortgage is not an adjustable rate mortgage (ARM). It is actually a fixed-rate mortgage having a term of five years (the 5 part of 5/25) with a built in option to refinance for the remaining 25 years. Principal and interest payments are amortized over a 30 year period. The result being, lower monthly payments than would be the case if the loan was amortized over the just the initial five year term. At the end of the five year period, you may pay off the outstanding balance with a lump-sum (balloon) payment or, exercise the option to refinance at current market rates for the remaining term of 25 years.
The option to refinance is conditional. To be eligible for the refinance option, you must meet certain conditions. Conditions may vary but typically include payment by the borrower of closing costs and a lender fee, as well as no 30-day late payments in the previous 12 months and no other liens on your property. You must occupy your property at the time of refinancing. You do not need to re-qualify for this loan when refinancing at the end of five years as long as the new interest rate is not more than five percent above the current interest rate.
The refinance condition of a 5/25 extendable mortgage is not automatic, you must exercise your option.
5/25 Extendable Mortgage Features:
- Popular if you plan to sell or refinance your home within five years and want a low monthly payment during that time.
- The interest rate you pay on a 5/25 extendable mortgage is usually lower than a comparable 30-year fixed-rate mortgage.
- The refinance option provides a "safety net" in case a planned relocation doesn't take place or economic conditions prevent you from moving to a larger home.
To summarize, a 5/25 extandable mortgage is a 5 year mortgage amortized over 30 years having a balloon payment at the end of the first 5 years which can be paid in full or, refinanced into a new fixed rate loan for the remaining 25 years.
When comparing the 5/25 extendable mortgage with a 5/1 ARM, the 5/1 ARM has a fixed payment for the first 5 years and in the 6th year, the interest rate adjusts and and adjusts each year thereafter for the remaining 25 years.