If you have young children or are close to retirement, lower interest rates and shorter terms may be the right fit.
A 20-year mortgage can save you thousands and help you build home equity faster than you would with a 30-year loan. It has lower interest rates and a shorter pay-off period — but make sure you can afford the higher monthly payments.
How does a 20-year mortgage rate compare to 30- and 15-year mortgages?
A 20-year mortgage is paid off in 20 years and is generally seen as the middle road, with most borrowers opting for a 30- or 15-year mortgage. It’s not as widely advertised, but it does have its perks.
The biggest benefit to a 20-year mortgage is lower interest rates. Typically, you’ll see fixed rates — meaning your interest rates and monthly payments won’t change. Expect rates around half a point lower than a 30-year mortgage, shrinking the total interest over the life of the loan. And you’re not saddled with the high monthly payments of a 15-year mortgage.
Here’s an example of what to expect from a $200,000 mortgage …
|Mortgage term||Interest rate||Monthly payment||Total interest paid|
Compare this with a 30-year fixed-rate mortgage at 4.5% — remember, the interest rates are higher for longer terms.
You’ll pay $1,013 each month and a whopping $164,813 in interest over the life of the loan. This doesn’t take into account closing costs like property and transfer taxes, maintenance fees and mortgage insurance. For many borrowers, the amount they save in interest is worth the higher monthly payments — and they get to own their home a full decade earlier.
This is sample data. Your rate will depend on your down payment, as well as your credit score and income. Since the monthly payments are higher than a standard mortgage, it’s harder to qualify for a 20-year mortgage.
Lenders that offer a 20-year mortgage
Benefits of a 20-year mortgage
A 20-year mortgage offers a few useful benefits for homeowners, including:
- Lower interest rates. You’ll pay less interest over the life of the loan than with a 30-year mortgage.
- Build equity quicker. Pay down your balance quicker to give you more equity in your home.
- Shorter path to home ownership. Keep up with your monthly payments and you’ll be debt free a full decade earlier than those with a traditional 30-year mortgage.
- Steady payments. With a fixed-rate mortgage, your monthly payment is predictable — not subject to market conditions like with an adjustable-rate mortgage (ARM).
Things to watch out for
Taking out a 20-year mortgage does have potential pitfalls to be aware of:
- Higher monthly payment. To use the same $200,000 loan example, you’ll pay nearly $200 more per month than you would for a fixed rate 30-year loan.
- Harder to qualify for. Eligibility requirements are tighter than for a 30-year mortgage, including a positive credit history and a debt-to-income ratio below 43%.
- Fewer tax perks. Less interest means a lower mortgage interest deduction.
Is a 20-year mortgage right for me?
With a 20-year mortgage, you’ll pay off your home a decade faster than most borrowers with a traditional 30-year mortgage, and the payments will be lower than a 15-year mortgage. It’s flexibility makes it the sweet spot for two particular types of borrowers:
- Young homebuyers who plan to have children and aim to pay off their mortgage before their kids go to college.
- People still in the workforce hoping to own their home before they retire.
Either way, you’ll need to be in a good financial situation to take on a 20-year mortgage. If the payments stretch your monthly budget too much or you’re interested in investing your money elsewhere, you might consider a longer term.
A 20-year mortgage is also ideal for refinancing. It’s more affordable than a 15-year mortgage and does away with the disadvantages of a 30-year mortgage — a long amortization and a huge amount of interest paid over the life of the loan.
Which banks offer 20-year mortgages?
Several banks and credit unions offer 20-year mortgages, though they’re not marketed as aggressively as other terms. They include:
A 20-year mortgage suits those who want to pay off their loan faster without committing to the high monthly payments of a shorter mortgage term. It also puts you in a strong position to refinance if interest rates dip.
Compare your options with our guide to mortgages.