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If you track mortgage rates, you’ll often hear about 30-year and 15-year mortgages. But in reality, there are more options than just those two terms. The 20-year mortgage, for example, is a fairly common mortgage product, offering an option for borrowers needing something that’s in between. And in today’s economic landscape, it might just be a smart move for your home purchase or refinance.
At the same time, with mortgage interest rates rising in recent weeks and market uncertainty pronounced right now, borrowers will need to approach their mortgage loan options carefully, especially if they elect for a slightly unconventional approach.
We asked some experts for their thoughts on a mortgage loan term of this size. Below, we’ll detail what they have to say about 20-year mortgages and when you might want to consider one for your upcoming financing needs.
Start by seeing how low a mortgage rate you can currently qualify for here.
Is a 20-year mortgage worth it now?
Despite a dip in rates earlier this year, mortgage rates have recently reversed course, rising steadily for the last three weeks straight. The 20-year mortgage offers consumers an option for avoiding those higher rates — or at least snagging one a bit lower.
“Depending on market conditions, the gap between 20-year and 30-year mortgage rates can fluctuate, and at times you may see a difference of up to about 0.375 percentage points,” says Baret Kechian, branch manager at loanDepot. “For example, if a 30‑year mortgage is 6.2%, that could make a 20‑year mortgage closer to 5.8%.”
It sounds small, but depending on the loan’s size, it could make a big difference. For example, a $400,000, 30-year loan at a 6.2% rate would come with $481,955 in long-term interest costs. That same loan at a 5.8% rate on a 20-year term, though, would save you over $200,000 in interest. Just note: 20-year loans do come with higher monthly payments. In the above example, you’d pay $2,820 per month for the 20-year loan, but only $2,449 for the 30-year one, thanks to the expedited loan term.
“A 20‑year loan is ideal for someone who wants to build equity faster without jumping to the steeper monthly payments of a 15‑year term,” says Bill Dawley, senior vice president of residential lending at Amegy Bank. “It’s a smart move if your budget can comfortably support a slightly higher payment in exchange for meaningful long‑term interest savings.”
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Why borrowers may want to consider other mortgage options
With skyrocketing gas prices and food costs on the up-and-up toomany Americans are struggling these days. So, taking on a higher monthly payment? That might not be the best course of action for every consumer.
“If your budget is tight, a 30‑year mortgage may be the better fit,” Kechian says. “Mortgage payments are only one part of the monthly cost of homeownership, and expenses like property taxes, homeowners insurance, private mortgage insurance, and other housing costs all add up and need to be factored in to make sure the payment is sustainable.”
And if you can afford the higher payment — and maybe slightly more, you actually may be better served by a 15-year mortgage than a 20-year one, experts say.
“The gap between 15‑year and 30‑year mortgages is typically more noticeable,” Kechian says. “15-year loans usually come with a lower interest rate up to .625% of savings compared to a 30-year, which means you’ll pay significantly less interest over the life of the loan and build equity much faster.”
Another option to explore is taking out a 30-year mortgage loan and just paying extra toward the principal regularly. This allows you to have the safety of the lower monthly payment, while still paying down your loan faster and reducing your long-term interest costs.
“Consider doing a 30-year fixed mortgage and making one extra payment to principal per year,” says Jeremy Schachter, branch manager at Fairway Home Mortgage. “This can turn a 30-year mortgage into a 22-year one with one extra payment.”
How to determine which mortgage loan is right for you
The best thing you can do is to know your budget, timeline and goals before choosing which mortgage loan to use.
“If your goal is to pay off your home faster, build equity more quickly, and secure a lower interest rate, a 20‑year mortgage can be a strong option,” Kechian says. “However, if keeping monthly payments more manageable and creating more flexibility in is the priority, a 30‑year mortgage may be a better fit.”
You should also think about any big life moves that might occur while you have the loan.
As Dawley explains, “If cash flow is tight or you expect life changes like retirement, childcare expenses or job shifts, a 30‑year loan may offer more breathing room. A good rule of thumb is after the mortgage payment, you should still be able to have an emergency savings account, contribute to your retirement account, and handle normal life expenses without stress.”
If you’re not sure what mortgage loan is the best fit for your home purchase or refinancetalk to a mortgage professional. They can walk you through your options and help you better determine your next steps.