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20-Year Mortgages: Are They Right For You?

Rachel Burris6-minute read

November 09, 2020

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When you’re in the market for a mortgage, it can be challenging to determine what loan term is appropriate for your circumstances. A 20-year mortgage is one of several options you can choose. However, before you make your decision, it’s useful to weigh the pros and cons against those of 15- and 30-year mortgages. Let’s take a look at why a borrower might choose a 20-year mortgage.

Types Of 20-Year Mortgages

There are a variety of loan types that offer 20-year terms. If you’re interested in obtaining a 20-year mortgage, you should review the requirements for Federal Housing Administration (FHA), Veteran’s Administration (VA) and conventional loans to determine which you qualify for.

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 expect to also pay private mortgage insurance (PMI).

Guaranteed by the Department of Veteran’s Affairs, VA loans provide a financing option that comes with lower costs and requirements to those who have served our country. To qualify, veterans typically need a FICO® Score of at least 620. If they meet that requirement, veterans don’t have to make a down payment or pay for PMI. Furthermore, lenders are often willing to provide them with an interest rate that’s .5% – 1% lower than usual.

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. Yet, 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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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.

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.

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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 I Refinance?

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.

Summary

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. For others, who have the funds to pay more each month, the 20-year mortgage may not pay down their loans as aggressively as they’d like. As with any term, there are pros and cons, but it can be a solid option for many.

To learn more about 20-year mortgage rates, contact a Home Loan Expert today.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

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Rachel Burris

Rachel Burris is a writer covering topics of interest to present and future homeowners, as well as industry insiders. Prior to joining Quicken Loans, she worked as an English teacher for the New York City Department of Education and a licensed real estate agent for Brown Harris Stevens. She holds a bachelor's degree in creative writing from Bucknell University, a postbaccalaureate certificate in psychology from Columbia University and a master's degree in English education from Teachers College, Columbia University.