A 20-year fixed-rate mortgage – the awkward middle child between the more popular 30-year and 15-year fixed-rate mortgages – allows you to pay off your loan at a faster rate and pay less in interest.
While you can save on interest over the course of the loan, you’ll face a higher monthly payment, and experts disagree on whether that tradeoff is worth it.
With interest rates having doubled from the start of 2022, mitigating interest costs is at the forefront of many homebuyers’ minds.
While it’s not as popular as your standard 30-year fixed rate mortgage, a 20-year mortgage might make perfect sense. It all depends on your financial goals and timeline.
What is a 20-Year Mortgage?
A 20-year mortgage is a fixed mortgage with a 20-year payback period. Your rate will never change over the course of amortization. Because “interest is calculated at the remaining principal value of your loan, a shorter term presents an opportunity to lower your interest costs with each payment,” at a faster rate, says Shashank Shekhar, founder and CEO of InstaMortgage.
If you’re looking to refinance your current loan, a 20-year, fixed mortgage is a popular choice.
Refinancing is when you take out another loan to pay off the balance on your existing loan. If you’re strapped for cash, refinancing to a 20-year, fixed-rate mortgage can be a good option, so long as your credit score is in good shape.
You may choose to refinance to a 20-year mortgage for a few reasons. For one, refinancing from a 30-year term to a 20-year term can be a good idea if you’re looking to pay down your loan sooner and save money on interest costs. If you have an adjustable-rate mortgage that is susceptible to increasing rates, the fixed-payments of a 20-year mortgage can be an attractive option.
20-Year Mortgage vs. 30-Year Mortgage
The main difference between a 20-year, fixed-rate mortgage and a 30-year, fixed-rate mortgage is right in the name. Both are considered long-term mortgages; they just have different payback periods.
Mortgages with a shorter payback period are generally recommended for those looking to save on interest costs. Keep in mind, though, that interest rates for 20-year and 30-year mortgages tend to be only a few basis points apart. It won’t be anything like the gap you see between those of today’s 30-year and 15-year mortgages.
“But even if the delta is not big, it’s the fact that you are paying off the loan over a shorter period that will result in significantly lower interest costs,” says Shekhar. For that reason, “The shorter term is always recommended, irrespective of the interest rate environment,” he says.
Other experts say you should opt for a longer term. “I’ll always say that your home is your worst investment,” says Nicole Rueth, producing branch manager with the Rueth Team Powered by OneTrust Home Loans. “So, to aggressively pay down your mortgage on a shorter term just takes away from your budget to invest in other things
A higher monthly payment makes it more difficult to qualify for a 20-year mortgage. Experts recommend having a credit score of 620 and a higher income level, to account for the higher payment.
Another option, which Rueth recommends, is to “put your mortgage in a 30-year, fixed, and pay it down shorter,” which allows for your “monthly payment to hit against your debt-to-income ratio on your credit score,” she says. “That payment is what is reported to credit bureaus, so it can allow you to be eligible for more down the road.”
Paying off a 30-year, fixed-rate mortgage faster can give you more flexibility with monthly payments.
The Pros and Cons of a 20-Year Mortgage
The most notable pro of a 20-year mortgage is the ability to save on interest costs. However, “The shorter you go on the term, the higher your monthly payment will be,” says Shekhar.
In an economy that is trending toward a recession, it’s crucial you consider whether your monthly payment will be feasible if you fall on hard times. With a 20-year, fixed-rate mortgage, you’re committing to a higher payment that “you can’t choose to lower without hurting your credit score,” says Rueth.
For some, there is a certain level of security that comes with having a fixed rate. If you’re looking for predictability in your amortization period, then a 20-year mortgage can be a useful financial planning tool, especially if building home equity is a goal.
The combination of “building equity and also saving a ton on interest costs over the term of the loan,” is a pro, “even if you’re not able to refinance down the road,” says Shekhar.
There are some scenarios when a shorter-term loan makes more sense. “You can use a 20-year mortgage to reach a specific goal. So, if I’m 50 years old and I have a goal of paying off my mortgage by the time I’m 70 years old, because I want to retire when I’m 65, then the 20-year amortization supports matching that goal,” says Rueth.
If you’re a first-time homebuyer, and this isn’t going to be your forever home, ensure that you can comfortably afford the payments for a 20-year, fixed-rate mortgage. Prioritizing and maintaining your credit score is going to make all the difference when it comes time for your next home.
What Are Today’s 20-Year Mortgage Rates?
On Friday, September 23, 2022 according to Bankrate’s latest survey of the nation’s largest mortgage lenders, the average 20-year mortgage rate is 6.560% with an APR of 6.590%. The average 20-year refinance rate is 6.570% with an APR of 6.590%.
Current 20-Year Mortgage Rates
|30-Year Fixed Rate||6.550%||6.570%|
|30-Year FHA Rate||5.820%||6.690%|
|30-Year VA Rate||5.930%||6.150%|
|30-Year Fixed Jumbo Rate||6.570%||6.580%|
|20-Year Fixed Rate||6.570%||6.590%|
|15-Year Fixed Rate||5.750%||5.780%|
|15-Year Fixed Jumbo Rate||5.760%||5.780%|
|10-Year Fixed Rate||5.920%||5.950%|
|5/1 ARM Rate||4.790%||6.610%|
|5/1 ARM Jumbo Rate||4.850%||6.350%|
|7/1 ARM Rate||5.910%||6.210%|
|7/1 ARM Jumbo Rate||6.040%||6.110%|
|10/1 ARM Rate||6.090%||6.210%|
|30-Year Fixed Rate||6.550%||6.560%|
|30-Year FHA Rate||5.830%||6.690%|
|30-Year VA Rate||5.900%||6.030%|
|30-Year Fixed Jumbo Rate||6.550%||6.560%|
|20-Year Fixed Rate||6.560%||6.590%|
|15-Year Fixed Rate||5.730%||5.770%|
|15-Year Fixed Jumbo Rate||5.770%||5.790%|
|10-Year Fixed Rate||5.910%||5.940%|
|5/1 ARM Rate||4.870%||6.760%|
|5/1 ARM Jumbo Rate||4.860%||6.810%|
|7/1 ARM Rate||5.870%||6.250%|
|7/1 ARM Jumbo Rate||6.030%||6.120%|
|10/1 ARM Rate||6.060%||6.230%|
Rates as of Friday, September 23, 2022
Is a 20-Year Mortgage Right for You?
Take stock of your eligibility and long-term goals. So long as you have a secure income and adequate emergency fund, a 20-year mortgage can help you reach your goals right on time.
Perhaps you’re looking to be debt-free faster but committing to the payments for a 15-year term is not feasible. A 20-year mortgage may be the perfect middle-of-the-road solution for that goal.
Maybe you’re looking to lower your monthly payment. In that case, opting for a 30-year mortgage is advisable.
“If you have a life goal that matches the term on your mortgage, then a 20-year mortgage makes a lot of sense,” says Rueth.
Closing the Gap
There are some notable discrepancies within the housing market that disproportionately affect Hispanic homebuyers. Latinos were 60% more likely to be denied home loans in 2020 compared to non-Latinos, according to a report by the non-profit advocacy group the National Association of Hispanic Real Estate Professionals. This means securing a loan for a home purchase may be particularly difficult for Hispanic borrowers. Lenders will consider whether you are an eligible borrower, but you can turn the tables and evaluate if they are the best lender for you. The best way to gain leverage is by shopping around and comparing rates and fees with multiple lenders to be sure you’re getting the best deal and a fair offer.