A 20-year mortgage can save you thousands of dollars in interest and help you build equity in your home much faster than you would with the most common 25-year mortgage — but with a shorter payoff period, your monthly payments will be higher.
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How does a 20-year mortgage rate compare to 25- and 15-year mortgages?
A 20-year mortgage is paid off in 20 years and is generally seen as the middle road, with many borrowers opting for a 25- or 15-year mortgage. It’s not as popular, but it does have its perks: you’re not saddled with the high monthly payments that come with a 15-year mortgage and you can avoid paying thousands more in interest than you would with a 25-year mortgage.
For a $200,000 mortgage at a fixed interest rate of 3%, you’d pay…
Let’s crunch the numbers. Say you’re looking at a $200,000 20-year fixed-rate mortgage with an interest rate of 3%. You’ll pay roughly $1,107.34 per month and cough up a total of $65,760.62 in interest.
Compare this with a 25-year fixed-rate mortgage at 3%: you’ll pay approximately $946.49 each month and a whopping $83,947.30 in interest over the life of the mortgage – although it’s just five years longer, you’ll pay a staggering $18,186.68 more in interest. For many borrowers, the amount they save in interest is worth the slightly higher monthly payments — and they get to own their home five years earlier.
Total Interest Paid
This is sample data. The rate you’re offered will depend on a variety of factors including the loan term, the interest rate (fixed vs. variable), your down payment, your credit score and income, among others.
Benefits of a 20-year mortgage
A 20-year mortgage offers a few useful benefits for homeowners, including:
Mid-sized monthly payments. Opting for a 20-year mortgage can help you dodge the expensive monthly payments that come with a 15-year mortgage, while paying slightly higher than a 25-year mortgage.
Build equity faster. Pay down your balance faster and own equity in your home more quickly.
Shorter path to home ownership. Keep up with your monthly payments and you’ll be debt free a full five years earlier than those with the more common 25-year mortgage.
Stable payments. Opt for a fixed-rate mortgage and your monthly payment won’t fluctuate, even if the market does.
Things to watch out for
Taking out a 20-year mortgage does have potential pitfalls:
Higher monthly payment. Your monthly payments will be slightly higher than those for a 25-year mortgage.
Stricter eligibility requirements. You’ll need to prove you have a strong credit history and sufficient income to make your higher monthly payments.
Tight cashflow. Having a shorter amortization period doesn’t leave much room for any cashflow shortages during financially tough times. Should you lose your job or face financial difficulties, a higher monthly payment might see you defaulting on your mortgage.
Is a 20-year mortgage right for me?
With a 20-year mortgage, you’ll pay off your home a full five years faster than most borrowers who opt for a 25-year amortization period, and your monthly payments will be lower than that of a 15-year mortgage. It’s flexibility makes the 20-year mortgage a sweet spot for a few particular types of borrowers:
Young homebuyers who plan to have children and aim to pay off their mortgage before their kids go to college or university.
People still in the workforce hoping to own their home before they retire.
Those who have extra cash leftover each month that could go towards a slightly higher mortgage payment.
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 period of 25-years.
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 25-year or higher amortization period — a huge amount of interest paid over the life of the mortgage and more years added on until you actually own your home.
Variable rate vs fixed-rate 20-year mortgages
Variable rate mortgages come with fluctuating interest rates that are not fixed for the term. A variable rate is typically expressed as the prime rate + or – a number. The prime rate can change based on the economy and is determined by the Bank of Canada’s overnight rate. While you might wonder why anyone would want to risk rising interest rates, a variable rate is usually fairly lower than a fixed-rate, especially for the first few years of your mortgage. But over the life of your mortgage, the variable rate can increase higher than the fixed-rate.
A fixed-rate will stay fixed for the term – whether that’s as low as 6 months or as high as 10 years. Once your term ends, you can refinance with the same lender or switch to another lender. A fixed-rate usually starts out higher than a variable rate, but may end up lower than the variable rate within a few years, again depending on the prime rate.
Which makes for the better choice depends on if you prefer knowing how much you’ll pay each month or whether you’re willing to take a risk on the prime rate staying low and competitive. What could be a better choice might be taking out a convertible mortgage, which allows you to reap the benefits of a low variable-rate for a few years and then switch to a fixed-rate mortgage once the prime rate rises. Another choice would be a hybrid or combination mortgage, which is usually a 50/50 combination of both a fixed-rate and a variable rate mortgage.
Which banks offer 20-year mortgages?
Most banks, online lenders and credit unions offer a 20-year mortgage. If your income and expenses allow you to contribute more toward your mortgage each month, a 20-year mortgage can save you thousands of dollars in the long run.
A 20-year amortization period suits those who want to pay off their mortgage faster without committing to the high monthly payments of a shorter amortization period.
The amortization period is the total length of your mortgage, while a term is the length of time you lock in your rate and terms for. Once your term ends, which is typically anywhere from 6 months to 10 years, you’ll need to refinance your mortgage.
Unless your mortgage terms include a prepayment penalty, there’s nothing stopping you from paying off your 20-year mortgage early. With an open mortgage, you can typically pay up to 15% or 20% of your original mortgage balance each year without facing prepayment penalties. Once your term expires and you need to renew your mortgage, you can also speak to your current lender about switching your amortization period – or remortgage with a new lender completely.
Yes. Every time you apply for a new mortgage, you’ll need to pay for various closing costs, which include lawyer’s fees and any other charges or taxes.
Refinancing your mortgage to a shorter amortization period is a great way to pay off your mortgage faster. Moving from a 20-year period to a shorter period, say 15- years, will reduce the amount of interest you pay over the life of your mortgage.
If you have an open mortgage, you can also usually pay up to 15% of the total mortgage amount each year without incurring any penalties. This can help lower the principal amount of your mortgage and ultimately save you thousands of dollars in interest.
Emma Balmforth is a producer at Finder. She is passionate about helping people make financial decisions that will benefit them now and in the future. She has written for a variety of publications including World Nomads, Trek Effect and Uncharted. Emma has a degree in Business and Psychology from the University of Waterloo. She enjoys backpacking, reading and taking long hikes and road trips with her adventurous dog.
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