5, 7 or 10-year term: choosing how long to fix

Three things the term changes

1. Leverage. Some programs lend less on short terms. Freddie Mac’s Conventional Small sheet sets 80% (7-year+ terms); 75% (5 to under 7 years)³, and its large-loan sheet does the same: 80% max LTV (7-year+), 75% (5 to under 7 years)⁴. If you want five years at Freddie, expect a smaller loan.

2. Prepayment. Declining premium schedules are built around the term. On a Fannie Mae 7-year loan the first two years are locked out entirely: 7-year: 2-year lockout, then 5-4-3-2-1⁵. On yield maintenance loans, the period usually runs to near the end of the term, so a longer term means a longer stretch of expensive exits.

3. The balloon. The shorter the term, the larger the balance you refinance, and the sooner you do it.

Worked deal: one $4 million loan at three terms

Illustration. A $4,000,000 apartment loan amortizes on a 30-year schedule. Assume a nearly flat curve: 6.20% for 5 years, 6.30% for 7 and 6.40% for 10. The owner might sell in year four. Use Fannie Mae’s published step-down schedules.

By term (illustration)	5-year	7-year	10-year
Rate	6.20%	6.30%	6.40%
Annual payment	about $294,000	about $297,100	about $300,200
Balance at maturity	about $3,731,000	about $3,604,000	about $3,382,000
Balance during year four (about)	$3,792,000	$3,795,000	$3,799,000
Step-down premium in year four	2% (5-4-3-2-1)	4% (two-year lockout, then 5-4-3-2-1)	4% (5-5-4-4-3-3-2-2-1-1)
Cost to sell in year four (about)	$75,800	$151,800	$152,000

The longer terms cost about $3,100 and $6,300 a year more in payments, a small price for pushing the refinance out by two or five years. The real cost of the longer term is the exit: selling in year four costs roughly twice as much on the 7 and 10-year schedules. If the sale is likely, the 5-year term wins. If you might hold, the 10-year term buys a decade of rate certainty for very little.

Notice the 7-year loan’s lockout. It cannot be prepaid at all in its first two years, which matters if a buyer appears early.

How to choose

Your plan	Term to favor	Why
Sell within five years	5-year, or floating	Lowest exit cost; check that leverage is not cut
Hold, but might refinance for cash out in year five to seven	7-year	Balance of rate certainty and exit cost
Long hold, stabilized	10-year or longer	Rate certainty; exit cost rarely paid
Generational hold, small building	12 or 15-year at Freddie, or fully amortizing HUD	Removes refinance risk
Value-add underway	None yet; bridge or floating	Fixed terms penalize the refinance you plan

The costs people miss

• Leverage cuts on short terms, as shown above for Freddie.
• Interest-only limits by term. Freddie Conventional Small allows full-term interest-only only at lower leverage on shorter terms: Full-term interest-only: 65% LTV (7 years or less), 70% (over 7 years)³.
• Refinance timing. A maturity in a weak year can force a paydown or a bridge loan. Leave room between your loan’s maturity and any lease rollover or renovation.
• Lockouts. A lockout means no prepayment at any price. Ask for it in writing, by month.
• Open periods. Most permanent loans open near the end. Fannie Mae’s open period: Typically no premium on a full prepayment from the last calendar day of the fourth month before the maturity month⁶. Plan any refinance to close inside it.

Not sure how long to fix? Send the property and your plan, and we will price the loan at each term with the exit cost in the quote.