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20-Year Vs. 30-Year Mortgage: How To Decide

Dan Rafter5-minute read

April 26, 2021

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When you’re ready to buy a home, you have plenty of choices for a mortgage loan. Among the main types of mortgages from which you can choose are 20-year or 30-year fixed-rate loans.

And while these mortgage types might be similar, they come with some key differences. You’ll have to determine whether you’re more interested in smaller monthly payments or in paying the least amount of interest possible when deciding between these two loan types.

20- Vs. 30-Year Mortgages: Understanding The Difference

Buyers often choose 20-year or 30-year fixed-rate mortgages because of the lower monthly payments and predictability that come with them.

The 30-year fixed-rate mortgage remains a popular one. As its name suggests, this mortgage loan has a term that lasts for 30 years, meaning that you have three decades to pay it back through regular monthly payments. It also has a fixed interest rate. The rate your loan has on its first day will be the same as on its last.

When you apply for a 30-year mortgage, lenders will look at several factors when determining whether to loan you money. First, they’ll study your three-digit FICO® credit score, a number that gives lenders a quick snapshot of how well you’ve handled your credit and paid your bills. Most lenders consider FICO® Scores of 740 or higher to be excellent ones, but you can often qualify for a 30-year mortgage even if your scores are in the lower 600s.

Lenders will also consider your debt-to-income ratio or DTI. This ratio measures how much of your gross monthly income your total debts consume each month. Most lenders want your total monthly debts, including your new mortgage payment, to equal no more than 43% of your gross monthly income.

Mortgage lenders will also pull your three credit reports, one each maintained by the national credit bureaus of ExperianTM, Equifax® and TransUnion®. These reports list your open credit accounts and loans and how much you owe on each of them. They also list recent missed or late payments and negative financial events such as recent bankruptcies or foreclosures.

Lenders will consider all this when you apply for a 20-year mortgage, too. This type of mortgage acts the same as a 30-year version: You’ll still pay back your loan in monthly payments with interest. The big difference: With a 20-year fixed-rate mortgage you have 20 years to pay back your loan instead of 30.

Your monthly payment will be higher with a 20-year mortgage because you are paying back your loan in a shorter amount of time. The positive? You won’t have to pay as much in interest over the life of your loan with a 20-year mortgage, both because these loans typically come with lower interest rates and because of the lower number of months it takes to repay these shorter-term loans.

Comparing Fixed Mortgage Rates: 20-Year Vs. 30-Year

Home buyers like longer-term mortgages – such as 30-year and 20-year loans – because they historically have come with lower interest rates. And a lower interest rate will reduce the size of your monthly mortgage payment.

The average interest rate on mortgages has fluctuated over the years. Freddie Mac data show that the average annual interest rate on 30-year fixed-rate mortgages hit its highest level in 1981, when it stood at 16.63%. Compare that to today: Freddie Mac said that the average rate on a 30-year fixed-rate mortgage was 3.04% for the week ending April 15.

No one can predict whether interest rates on either 30-year or 20-year fixed-rate mortgages will rise or fall in the coming months. What’s important to remember is that even if they do rise or fall slightly, mortgage interest rates today remain extremely low historically.

Great news! Rates are still low in 2021.

Missed your chance for historically low mortgage rates in 2020? Act now!

How To Choose Your Loan Term

Say a couple – Sam and Quinn – are ready to buy a home. How can they determine if a 30-year or 20-year fixed-rate mortgage is right for them?

First, they’ll have to determine whether they’re more interested in a lower monthly payment or if they’d rather pay less in interest during the life of their loan. If cash flow and smaller monthly payments are more important, a 30-year fixed-rate loan might be the smarter choice. If they’re focused instead on paying as little as possible to borrow their mortgage dollars, Sam and Quinn might do better to take out a 20-year mortgage. That way, they’ll get a lower interest rate and will pay less interest over the life of their loan.

Another factor? How long the couple expects to live in their new home. The difference in interest payments might not be as important if the couple expects to move after 5 or 7 years, so Sam and Quinn might choose the lower payments of a 30-year mortgage. But if the couple wants to stay in the home for decades, the drop in interest payments, and a 20-year mortgage, might make more sense.

The table below shows the difference in monthly payments and interest depending on whether Sam and Quinn choose a 30-year or 20-year fixed-rate mortgage. Note that the monthly payments listed below do not include other costs that are typically included in a mortgage payment, including property taxes and homeowners’ insurance.

$200,000 Loan Amount

20-Year Fixed

30-Year Fixed

Mortgage Rate:

2.5%

3%

Monthly Payment:

$1,059

$843

Monthly Difference Saved:

$216

Loan Life Interest:

$54,410.63

$103,601.28

Loan Life Interest Saved:

$49,190.65

20-Year Mortgage: The Pros And Cons

The 30-year mortgage is one of the more common mortgage types. But 20-year fixed-rate mortgages don’t get as much press. For many buyers, though, a 20-year mortgage can be a good midpoint between the lower costs of 30-year fixed-rate mortgages and the lower interest payments that come with 15-year fixed-rate mortgages.

With a 20-year fixed-rate loan you’ll make lower monthly payments than you’d get with a 15-year loan while paying less interest than you would with a 30-year version.

The Pros

Lower interest rate: The interest rate with a 20-year mortgage will be lower than those attached to 30-year loans.

Consistent payments: Your interest rate won’t change over the life of your loan. This makes monthly payments more consistent, though they might still rise or fall depending on how much you pay each year for homeowners’ insurance and property taxes.

You can build equity faster: Equity is the difference between what you owe on your mortgage and how much your home is currently worth. If you owe $150,000 and your home is worth $220,000, you have $70,000 of equity. You can borrow against your equity in the form of home equity loans and home equity lines of credit, better known as HELOCs. You can then use the money from these loans, on anything. You’ll build equity faster with a shorter-term loan than you will with a longer-term one. It’s important to note that Rocket Mortgage® does not offer home equity loans or HELOCs.

The Cons

Higher monthly payment: Because a 20-year mortgage has a shorter term, you’ll pay a higher payment each month. That’s because your repayment period is squeezed into a window that is 10 years shorter than what you’d get with 30-year mortgage.

Your savings in interest could be even higher: While you’ll lower the amount of interest you’ll pay compared to a 30-year loan, you could save even more in interest payments if you instead take out a 15-year fixed-rate mortgage. Of course, your payment will be even higher each month with a 15-year loan.

The Bottom Line: Shorter Terms Are Best If You Can Afford It

Mortgage loans with shorter terms are always the best financial deal because of the amount of money you’ll save in interest payments. Remember, though, that you should only apply for a short-term mortgage if you can comfortably afford the higher monthly payment. If you can, and you’re interested in paying less in interest, it makes sense to consider either a 20-year or 15-year mortgage.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.