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. Typically, 20-year mortgage rates are lower than 30-year rates.
30-Year Vs. 20-Year Mortgage Interest Example
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.
15-Year Vs. 20-Year Payment Example
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.
FAQs
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.
What are the disadvantages of a 20-year mortgage? ›
However, one disadvantage is that the monthly payments on a 20-year mortgage are higher than those on a longer-term loan, which could strain your cash flow and budget. The higher monthly payments may also limit the amount of money you have available for other investments or savings goals.
Should I go for a 20-year mortgage? ›
20-year mortgages will give you slightly higher monthly payments so make sure you can fully afford them before you commit but you will pay less at the end as you won't pay as much interest as a 30-year mortgage for example.
Are 20-year mortgages good? ›
If it's more important to you to lower your monthly payments to stretch your monthly budget, a longer-term mortgage is probably a better choice. But if you'd prefer paying less in interest even if it means higher costs each month, a 20-year loan could do the trick.
When you look for the best mortgage you should consider? ›
Take a look at your finances.
Borrowers with fair credit and little savings could consider a government-backed loan, while those with very good credit and a low debt-to-income ratio may get better rates through a conventional loan.
At what age should you no longer have a mortgage? ›
To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.
How many years is best for mortgage? ›
If, rather than going for a 25-year term, you choose a 30-year mortgage then your monthly payments will be reduced, giving you more cash to spend on things that are important to you. If you've struggled to get enough capital together for a deposit, a longer mortgage term makes owning a house more affordable today.
Is 50 too old for a 30-year mortgage? ›
If you can demonstrate an ability to repay the loan before you're 75 years old, they will consider your application no matter your age! For example, if you needed to borrow $300,000 and were 50 years old, the standard 30-year mortgage term could be reduced to 25 years and your loan would be approved.
Will interest rates go down in 2024? ›
In Fannie Mae's latest rate forecast, the government-sponsored enterprise said it expects 30-year fixed rates to end 2024 at 6.4%. When the Federal Reserve lowers the federal funds rate, mortgage rates typically go down in response.
What is the average 20-year mortgage rate? ›
As of May 17, 2024, the average 20-year-fixed mortgage APR is 6.56%.
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.
Do banks give 20-year mortgages? ›
A 20-year fixed mortgage may be a good option for you if you find the monthly payment on a 30-year mortgage low but the monthly payment on a 15-year mortgage too high. Visit our fixed-rate loan calculator to estimate your 20-year fixed mortgage monthly payment.
Do you get a lower interest rate with a 20-year mortgage? ›
Reduce total interest: 20-year mortgages generally offer lower interest rates than their 30-year counterpart. Furthermore, the mortgage loan is for a relatively short time period, resulting in less interest over the long haul.
What are the 4 C's in a mortgage? ›
So, what do lenders look at when deciding to approve or deny an application? Lenders consider four criteria, also known as the 4 C's: Capacity, Capital, Credit, and Collateral. What is your ability to pay back your mortgage?
What is the best type of mortgage for Dave Ramsey? ›
A: Dave Ramsey recommends a 15-year, fixed-rate conventional loan.
Is FHA better than conventional? ›
An FHA loan may be a better option if you have a lower credit score, a higher DTI ratio, or less money saved for a down payment. On the other hand, a conventional loan may work better if your finances are sound and you can qualify for favorable loan terms.
Is it better to take a 20 or 30-year mortgage? ›
With a 20-year mortgage, you'll pay significantly less interest but have a higher monthly payment. With a 30-year mortgage, you'll pay more interest, but the monthly payments might be easier to manage.
What is the disadvantage of a long-term mortgage? ›
Disadvantages of a long-term fixed-rate mortgage
One of the main disadvantages of a longer-term fixed rate is that your mortgage payments may be higher, at least initially.
Why is it better to have a 15-year mortgage? ›
If you can afford the larger monthly payment that comes with a 15-year fixed mortgage, it can help you pay off your home, freeing up funds for retirement. You will spend less in interest over the life of the loan compared to a 30-year mortgage, and usually, a 15-year fixed mortgage means a better interest rate.
Why is a 15-year mortgage better than a 30-year mortgage? ›
Since you're making bigger monthly payments on a 15-year mortgage, you'll pay down the interest a lot faster, which means more of your payment will go to the principal every month. On the flip side, the smaller monthly payments of a 30-year mortgage will have you paying down the interest a lot slower.
