The 3,500lb capacity is the dead weight limit. That means if you are not using weight distribution bars/equipment (in otherwords, nothing connecting trailer to hitch other than coupler and safety chains), then that is your capacity. The 5,000 lb capacity is the limit if you are using weight distribution equipment such as this:
http://www.hitchcorner.com/weight_distribution.htm
So if you want to tow more than 3,500, you'll need weight distribution equipment in addition to your hitch.