US-18 : Cons Of A 20-Year Mortgage & Types Of 20-Year Mortgages

Cons Of A 20-Year Mortgage & Types Of 20-Year Mortgages

A 20-year mortgage also has some downsides. Let’s review some of the most common disadvantages.

Higher Interest Payments Than A 15-Year Mortgage

Just as you pay more interest with a 30-year term than a 20-Year Mortgages, 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 a result of making payments for an additional 5 years and having 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 15-year mortgage.

Eventually, the 20-year mortgage would cost you almost $52,000 more than the 15-year mortgage. Therefore, one disadvantage of the 20-year term is that it’s ultimately more expensive than the 15-year term despite allowing for a lower monthly payment.

Less Financial Flexibility Than A 30-Year Mortgage

When choosing a 20-year mortgage, a borrower commits to paying off their loan in 10 years less than they would’ve paid off their loan with 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 between a 30-year mortgage and 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 Mortgages 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, creating 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, multiple factors can influence whether a refinance is a good decision. Here are some situations where refinancing to a 20-year mortgage could be beneficial:

Interest rates have dropped significantly since you purchased your home.
You have an adjustable-rate mortgage and can save money by switching to a fixed-rate loan.
You 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 and use it to make home improvements, consolidate debt, etc.

The Bottom Line- 20-Year Mortgages

A 20-year mortgage is a great compromise if you’re on the fence about which loan term to choose. 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 with a 15-year term.

Yet, for some borrowers, the monthly payments that come with a 20-year term may still be too high to fit into their budget. As with any mortgage term, a 20-year home loan has pros and cons, but it can be a solid option for many home buyers.

Even with the state of the economy and your qualifying factors having a role to play, 20-year mortgage rates will likely be lower than 30-year mortgage rates and higher than 15-year mortgage rates.

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

If you decide to go for a 20-year mortgage, you’ll want to get the best mortgage rate possible. The good news is that locking in a 20-year mortgage rate is similar to finding a favorable interest rate for any other type of loan. Start by comparing mortgage lenders and rates and reading customer reviews. You can also take the steps to improve your qualifying factors, like your credit score and debt-to-income ratio (DTI).

Types Of 20-Year Mortgages

You can find several types of 20-year mortgage options. Here are a few of the most often-used loan types.

FHA 20-Year Mortgages

FHA loans are a great option for those who have a low credit score or minimal savings. To secure 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 a mortgage insurance premium (MIP).

VA 20-Year Mortgages

VA loans are guaranteed by the Department of Veterans Affairs. The goal of these loans is to provide an affordable financing opportunity for eligible veterans and active-duty service members, as well as surviving spouses who meet certain criteria. For you to qualify, lenders typically require a FICO® Score of at least 620. If you meet that requirement, you won’t have to make a down payment or pay for private mortgage insurance (PMI).

Conventional 20-Year Mortgages

The more standard option for a 20-year mortgage is 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 DTI of 50% or less.

How 20-Year Mortgages Compare To Other Loan Terms

A 20-year and a 30-year mortgage both offer potential home buyers a relatively long term. With a 20-year mortgage, you can expect a higher monthly payment than with a 30-year home loan – but you’ll pay off your mortgage sooner if you go with a 20-year term.

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 a 15-year mortgage where you’ll have a larger monthly payment but pay off your loan sooner.

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 mortgage term shorter than 30 years, a 20-year mortgages might be the right move for you. And if you want some more flexibility in your budget than a 15-year term allows, a 20-year term could provide that wiggle room.