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20-Year Mortgage: Definition, Rates And Types

Sarah Sharkey7-minute read

October 26, 2021

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Shopping around for a mortgage comes with plenty of challenges. But one of the first hurdles you need to clear is deciding what loan term is right for your situation. A 20-year mortgage is one of the many options available. Is a 20-year mortgage right for you? Let’s weigh the pros and cons so that you can decide for yourself.

What Is A 20-Year Mortgage?

A 20-year mortgage is a fixed-rate mortgage with a repayment period of 20 years. As with all fixed-rate mortgages, this means that the interest rate will remain stable over time. 20-year terms are not available for adjustable-rate mortgages. With that, you lock in a regular payment for 20 years.

Although 15- and 30-year mortgages are more popular, 20-year mortgages offer a way to tap into the best of both worlds. 20-year mortgages offer the chance to spread out the costs over a longer period of time than a 15-year mortgage. But a shorter loan term than the popular 30-year mortgage offers the opportunity to save on interest charges.

Many buyers find this to be a happy medium for their short-term budgeting goals and long-term financial goals.

20-Year Mortgage Rates

There are a variety of factors that go into determining the rate of a 20-year mortgage. However, 20-year mortgage rates are typically lower than 30-year mortgage rates yet higher than 15-year mortgage rates.

Speak with a Home Loan Expert to find out current 20-year mortgage rates and lock in yours today.

How To Get The Best Rate On A 20-Year Mortgage

If you decide to go for a 20-year mortgage, you’ll want to get the best rate possible. Here’s how to get the best mortgage rate on a 20-year mortgage.

The good news is that locking in the best 20-year mortgage rates is similar to finding the best interest rate for any other type of loan.

The first place to start is by choosing the best mortgage lender with low rates and excellent customer reviews. Additionally, you can push your rate lower by taking action to improve your credit score.

Types Of 20-Year Mortgages

You can find several different types of 20-year mortgage options. Here are a few of the most popular options.

FHA 20-Year Mortgage

FHA loans are a great option for individuals who have a low credit score or minimal savings. To obtain an FHA loan, you must have a credit score of 580 or higher and make a down payment of at least 3.5% of the purchase price. However, if you go with an FHA loan, you should also expect to pay mortgage insurance premium (MIP).

VA 20-Year Mortgage

VA loans are guaranteed by the Department of Veteran’s Affairs. The goal is to provide an affordable financing opportunity for veterans. To qualify, lenders typically require a FICO® Score of at least 620. If they meet that requirement, veterans don’t have to make a down payment or pay for private mortgage insurance (PMI). Furthermore, lenders are often willing to provide them with an interest rate that’s .5% – 1% lower than usual.

Conventional 20-Year Mortgage

The more standard option for a 20-year mortgage would be a conventional loan. First-time home buyers can often make a down payment as low as 3% with this loan type; however, most buyers must put at least 5% down.

Keep in mind that if you make a down payment of less than 20%, you’ll have to pay for PMI. To qualify for a 20-year conventional loan, you’ll need a credit score of at least 620 and a debt-to-income ratio of 50% or less.

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How 20-Year Mortgages Compare To Other Loan Terms

20-year and 30-year mortgages each offer potential home buyers a relatively long term. With a 20-year mortgage, you can expect to find a higher monthly payment. But the debt will be cleared from your books sooner.

On the other hand, the lower payment associated with a 30-year mortgage can allow more financial flexibility if life throws unexpected expenses your way. Of course, you can also swing in the other direction with 15-year mortgages to find even larger monthly payments.

Ultimately, a shorter mortgage term will result in a larger monthly payment. And you’ll be able to pay off your mortgage more quickly.

If you can afford a shorter mortgage term, that might be the right move. But if you want some more flexibility in your budget, a mortgage with a longer term could provide more wiggle room. Remember, you can choose to make extra payments on your mortgage if you want to

Pros Of A 20-Year Mortgage

Getting a 20-year mortgage is a good way to balance the trade-offs of a 30-year and 15-year mortgage. Let’s take a look at what specifically makes a 20-year mortgage advantageous.

Lower Interest Payments Than A 30-Year Mortgage

The most obvious benefit of 20-year mortgages is that they enable borrowers to make lower interest payments than they would with a 30-year mortgage. Yet, it’s not just the shorter term that enables borrowers to save on interest. Twenty-year mortgage rates are typically lower than 30-year rates.

To see just how much borrowers can save with a 20-year mortgage, let’s take a look at an example. You want a $350,000 loan to purchase a home. Your lender tells you that they can offer you a 30-year mortgage with an interest rate of 4.99% or a 20-year mortgage with an interest rate of 4.38%.

If you choose the 30-year term, you’ll pay $325,625.40 in interest over the life of the loan. However, if you choose the 20-year term, you’ll only pay $175,774.41 in interest over the life of the loan. Therefore, the 20-year mortgage is ultimately more affordable. By choosing a 20-year over a 30-year term, you save $149,851 in interest.

More Financial Flexibility Than A 15-Year Mortgage

With a 20-year mortgage, it may take longer to build up equity in your home and pay off your loan, but your monthly payments are significantly lower than they’d be with a 15-year term. While some people like the idea of getting rid of debt faster, others believe it’s better to have more financial flexibility.

How much lower would your monthly payments be with a 20-year term compared to a 15-year term? Suppose you’re looking for a $350,000 loan to purchase a home, and your lender tells you they can offer you a 20-year mortgage with an interest rate of 4.38% or a 15-year mortgage with an interest rate of 4.25%.

If you choose the 20-year term, your monthly payments would be $2,190.73, but if you select the 15-year term, your payments would jump to $2,632.97 each month. By getting a 20-year mortgage, you save $442.25 each month and have the flexibility to choose how to use the funds.

Choosing the 15-year mortgage may ultimately put you at risk of defaulting. If your financial circumstances change due to job loss or unexpected medical bills, you may find that you can’t pay the full amount.

However, with a 20-year mortgage, you can use the savings from your lower monthly payments to build up an emergency fund, invest or pay for daily expenditures. Furthermore, even if you choose a 20-year term, you can still make larger payments than you’re required and pay off your mortgage early.

Cons Of A 20-Year Mortgage

To understand the downsides of a 20-year mortgage, you again have to compare it to 15-year and 30-year mortgages.

Higher Interest Payments Than A 15-Year Mortgage

Just as you pay more interest with a 30-year term than a 20-year term, you’ll have to make higher interest payments if you select a 20-year mortgage over a 15-year mortgage. Again, the increased amount is due to the fact that you’re making payments for an additional 5 years and receiving a higher interest rate.

If we return to the previous example used to compare 20-year mortgages with 15-year mortgages, the 20-year mortgage rate is 4.38%, while the 15-year rate is 4.25%. Based on these interest rates, you’d pay $175,744.41 in interest for a 20-year mortgage and $123,935.40 for a 30-year mortgage.

Over the life of the loan, the 20-year mortgage would cost you almost $52,000 more than the 15-year. Therefore, the disadvantage of the 20-year term is that it’s ultimately more expensive than the 15-year term despite the fact that you pay less each month.

Less Financial Flexibility Than A 30-Year Mortgage

When choosing 20-year mortgages, borrowers commit to paying off their loans in 10 years less than they would’ve had they chosen a 30-year mortgage. Because their loan term is shorter, their monthly payments are higher.

Let’s return to the example used to examine how interest payments differ with a 30-year mortgage compared to a 20-year mortgage. If you choose the 30-year term, your rate will be 4.99%, and your monthly payments will be $1,876.74. However, with a 20-year mortgage rate of 4.38%, your monthly payments will be $2,190.73.

Therefore, although choosing a 20-year term enables you to save on interest payments in the long run, it’s less affordable in the short term. With a 20-year mortgage, you’ll have less spending money each month, giving you less financial flexibility.

Should You Refinance To A 20-Year Mortgage?

A 20-year mortgage is extremely beneficial for anyone who wants to pay off their mortgage more aggressively while still keeping monthly payments relatively low. However, the decision to refinance is dependent on multiple factors. Here are some situations in which it would be a good idea to refinance:

  • Interest rates have dropped significantly since you purchased your home.
  • You currently have an adjustable-rate mortgage and can save money by switching to a fixed-rate loan.
  • You currently have a 30-year term but can now afford to make the higher payments associated with a shorter-term loan.
  • You want to take money out of the equity you’ve built in your home to make home improvements, consolidate debt, etc.

The Bottom Line

Twenty-year mortgages are often seen as great compromises for those on the fence about which loan term they’d prefer. Obtaining a 20-year mortgage can allow you to save more money on interest than you would with a 30-year term and have lower monthly payments than a 15-year term.

Yet, for some borrowers, the monthly payments that come with a 20-year term may be too high to fit into their budgets. The 20-year mortgage may not pay down their loans as aggressively as they’d like for others who have the funds to pay more each month. As with any mortgage term, there are pros and cons, but it can be a solid option for many.

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Sarah Sharkey

Sarah Sharkey is a personal finance writer that enjoys helping readers learn more about their finances. She has an MS in Business Management from the University of Florida. You can connect with her on LinkedIn or Instagram @adventurousadulting.