US-17 : What Is A 20-Year Mortgage, And Should You Consider One?

What Is A 20-Year Mortgage, And Should You Consider One?

Shopping around for a mortgage comes with plenty of challenges. One of the first hurdles you’ll need to clear is deciding on the best loan term (how long the money is borrowed) for your situation. One term that’s available in many cases but not as commonly used as some other loan terms is a 20-year mortgage. Up next, we’ll take a deep dive into 20-year mortgages, so you have a clear understanding.

Can You Get A 20-Year Mortgage?

Yes, 20-year home loans are available to those who qualify.

While this isn’t the most popular mortgage term, a 20-year mortgage exists alongside the more prevalent 15-year and 30-year loan terms. Let’s explore exactly what a 20-year mortgage is before taking a closer look at the different types of 20-year home loans as well as the pros and cons of this mortgage option.

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 the interest rate will remain stable over time and you lock in a regular payment for 20 years. A 20-year loan term isn’t available for adjustable-rate mortgages.

20-Year Mortgage
20-Year Mortgage (Image Source)

Although 15- and 30-year mortgages are more popular, 20-year mortgages offer a way to enjoy the best of both worlds. A 20-year mortgage lets you spread out the costs over a longer period of time than a 15-year mortgage, which means a lower monthly mortgage payment. Compared to a 30-year mortgage, a 20-year home loan has an abbreviated loan term and therefore gives you the opportunity to save on interest charges over the duration of the loan.

Many buyers find the 20-year mortgage to be a happy medium for their short-term budgeting and long-term financial goals.

20-Year Fixed Mortgage Rates

Various factors go into determining mortgage rates, including the rate of a 20-year mortgage. These factors include the health of the economy, inflation, the Federal Reserve and the bond market. While a borrower can’t control how these variables influence mortgage rates, you can always work on improving the personal factors that help you qualify for a loan.

Pros Of A 20-Year Mortgage

Getting a 20-year mortgage is a good way to balance the tradeoffs 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

One of the biggest benefits 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 consider 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 total interest. 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 enjoy a $442.25 lower payment each month and can choose how to use the funds.

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.

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