The 30-year fixed-rate home mortgage dominates the housing market, particularly for first-time buyers who appreciate the ability to extend their home loan payments for the longest possible term. The second most common fixed-rate loan term is 15 years. However, many lenders also offer loan terms of 10 or 20 years. Sometimes lenders even offer a personalized term chosen by the borrower. One option is a 20 year mortgage.
On average, a person will save a significant amount of interest when either purchasing or refinancing into a 20-year mortgage compared to a 30-year. Here are four reasons to consider a 20-year mortgage:
Save on interest:
The interest rate of a 20-year mortgage is typically one-fourth of one point to three-eighths of one point lower than a 30-year fixed mortgage. This means, on an average, a person will save a significant amount of interest when either purchasing or refinancing into a 20-year mortgage compared to a 30-year. Let’s say a borrower has a shorter loan term and a lower interest rate, on a $280,000 loan amount. They can save approximately $85,000 in interest over the life of the loan.
Pay off the loan faster:
When a borrower is refinancing to get a lower interest rate, they’re able to take their original 30-year mortgage and refinance into a 20-year mortgage. This would potentially keep them on their payoff goal, as a result. Thus, they don’t have to start all over with a new 30-year mortgage.
Match the payoff to retirement goals:
Let’s say a borrower is in their late 30s and plans to retire in their 60s. Applying for a 30-year mortgage would push their potential payoff of their house into their 70s. Choosing a 20-year mortgage would keep them potentially on track for having their house paid off in their 60s.
A 20-year mortgage is a good alternative to a 15-year mortgage. Many home buyers can’t stretch their budget to make the higher payments required to pay off a mortgage in 15 years, but yet they want to pay off the home faster. The borrower is still paying off the loan in 10 years less than a 30-year mortgage. If the borrower ever wanted to, they have the ability to make extra payments.
Speaking with a Vellum mortgage professional will ensure that you obtain the mortgage that’s right for your story.