20-year fixed-rate mortgages explained
Quick insights
- A 20-year fixed-rate mortgage lets you borrow the money to buy a home and pay it back with fixed principal and interest payments over a 20-year (240-month) period.
- A 20-year fixed-rate mortgage can allow you to pay off the mortgage sooner than a 30-year mortgage and may have a lower interest rate, but it may also have a higher monthly payment.
- A 20-year fixed-rate mortgage may be a good option depending on your financial situation and long-term financial goals.
When you apply for a mortgage loan, you’re likely to be offered either a 30-year or 15-year term. While these are common, they aren’t the only options. Another option some homebuyers may want to consider is a 20-year fixed-rate mortgage. These loans may help provide some of the benefits of a 30-year mortgage, while allowing you to pay off the mortgage in less time.
What is a 20-year mortgage?
A 20-year fixed-rate mortgage is a home loan that’s typically paid off over a 20-year (240-month) period, and your monthly principal and interest payment stays the same over the life of the loan. Because you’re paying off your loan in less time compared to a 30-year mortgage, you’ll likely have a higher monthly payment, but you’ll also pay less in interest over the life of the loan.
What do you need to qualify for a 20-year fixed mortgage?
The requirements to qualify for a 20-year fixed-rate mortgage are essentially the same as they would be for a 30-year mortgage. These include having a qualifying:
- Credit score: Usually, you’ll need 620 or higher for a conventional mortgage, and 500 or higher for a Federal Housing Administration (FHA) mortgage.,
- Debt-to-income (DTI) ratio: While lenders typically prefer 36% or lower, in some instances, Fannie Mae will allow a DTI up to 45%.
- Proof of qualifying income and employment: You’ll likely need to anticipate a higher monthly payment compared to what’s required for a conventional 30-year mortgage.
What are current 20-year fixed mortgage interest rates?
Interest rates can vary depending on the economy. However, according to data from Freddie MacⓇ, the average mortgage interest rate has typically been lower on shorter loan terms. While every lender is different, they may offer an interest rate on a 20-year fixed-rate mortgage that falls somewhere in between.
How does a 20-year fixed-rate mortgage affect my monthly mortgage payment?
Let’s assume you need a $400,000 mortgage to buy a home. A lender offers you a 7% interest rate for a 30-year fixed-rate mortgage and a 6.5% interest rate for a 15-year fixed-rate mortgage. You ask about a 20-year fixed-rate mortgage, and the lender offers you a 6.75% interest rate.
Although other costs and fees may apply that could impact the monthly payment amount, here’s an example of how the numbers break down:
30-year mortgage with a 7% interest rate:
- Monthly payment: $2,661
- Total interest paid: $558,036
15-year mortgage with a 6.5% interest rate:
- Monthly payment: $3,484
- Total interest paid: $227,197
20-year mortgage with a 6.75% interest rate:
- Monthly payment: $3,041
- Total interest paid: $329,949
As you can see, the 20-year mortgage offers a monthly payment between the 15-year and 30-year terms. The total interest paid over the life of the loan will also fall between the 30- and 15-year options.
What types of mortgages can you get with a 20-year term?
A 20-year fixed rate mortgage might be available for various loan products—including conventional, jumbo, FHA, U.S. Department of Veterans Affairs (VA) and U.S. Department of Agriculture loans (USDA). Check with your lender to be sure. Chase does not offer USDA loans.
Should you consider a 20-year fixed mortgage?
When deciding if a 20-year mortgage makes sense for you, compared to a 30-year or 15-year mortgage, there are some things to consider first.
When you can afford a higher monthly payment
A 20-year fixed-rate mortgage may make sense if you can cover the monthly payment, including taxes and insurance, and can maintain a DTI of 36% or less. If not, you may want to stick with a 30-year mortgage and refinance to a shorter loan term later.
When you want to refinance to a shorter repayment period
Let’s say you begin with a 30-year mortgage term. If you refinance your mortgage within the first 10 years of owning your home, you may benefit from refinancing to a 20-year fixed-rate mortgage. Assuming you have sufficient income to cover your monthly payments, you could pay off your mortgage sooner and pay less in interest over the life of the loan.
When you need to lower your monthly payments
If you’ve been paying off your 30-year mortgage for 15 years or longer and find you need to lower your monthly payments, refinancing to a 20-year mortgage may be an alternative way to accomplish this. Keep in mind, it will take longer for you to pay off your mortgage, and you’ll likely pay more in interest in the long term.
When you’re buying a home later in life
A 20-year repayment period may also make sense if you’re buying later in life. For example, if you buy a home at age 25 and want to retire by 65, a 30-year mortgage gives you time to pay off your mortgage by age 55 and then leave 10 years to direct more of your income toward retirement.
However, if you buy your home when you’re 35 and want to retire by 65, a 20-year mortgage also lets you pay off the loan by age 55, allowing the same amount of time to direct your income toward retirement. Just make sure you have enough income to cover the higher payments.
Alternatives to 20-year fixed mortgages
If you’re looking for an alternative to a 20-year or 30-year fixed-rate mortgage, you may want to consider one of the following options.
Adjustable-rate mortgage (ARM) loans
If you’re trying to pay less in interest but can’t afford the higher payments of a 20-year or 15-year loan, an adjustable-rate mortgage may be worth considering. These loans offer a lower introductory interest rate for a fixed term, usually ranging from three to 10 years. After that, the rate adjusts based on current interest rates. These loans may make sense if you plan to sell or refinance before the introductory rate expires.
Pay down your loan faster
If you can’t afford the higher monthly payments of a 20-year mortgage, you could take out a 30-year mortgage and make extra payments toward your principal mortgage balance. You can do this by paying more each month, making an extra payment each year or making bi-weekly payments on your loan. This can shorten the repayment period by months or years, depending on how much you pay and how often.
Use a mortgage recast
A mortgage recast is a process that allows a borrower to reduce their monthly mortgage payments by making a large lump-sum payment towards the principal balance of the loan. This payment reduces the principal balance, and the lender then recalculates the monthly payments based on the new, lower balance while keeping the original loan term and interest rate unchanged. This can save you money on the closing costs of a mortgage refinance and may make sense if your loan interest rate is lower than current rates.
In summary
If you’re considering homebuying options, a 20-year fixed-rate mortgage could provide a good middle ground between the more common 30-year and 15-year fixed-rate mortgages that are usually offered. Working with a home lending expert can help you determine which option can fit your budget and financial goals.
