15-20 or 30 Year Mortgages?
Does a 30-year mortgage seem painfully long? Well, it does for many homeowners, but fortunately, it's not the only option. Whether you're looking to purchase or refinance your home, you could save a lot by going for the under-the-radar 20-year mortgage.
20 year home loans can be the perfect mortgage for consumers not wanting to stretch their mortgages all the way out to 30 years and who are not 100% sure that they can afford the payments of a 15 year or 10 year mortgage. Most 20 year mortgages do not have pre-payment penalties meaning you could shorten your term to 15 years by making additional principle payments each month (ask your loan consultant if there are any pre-payment penalties associated with the loans you are considering). 20 year home loans are the middle ground between the added interest of a 30 year loan and the additional payment weight of a 15 year loan.
But while it's not as common, the 20-year mortgage does have its own advantages. So, how do you know whether a 20-year loan is the best option for you? Keep reading to find out the important factors to consider regarding this rare but potentially beneficial mortgage.
The Interest Rate
Although 20-year mortgages are considered rare, industry experts say homeowners are attracted to them because of their interest rates, which typically are lower than those attached to 30-year loans. The interest rate on a 20-year fixed-rate mortgage is typically about .25% lower than the 30-year mortgage. That may not sound like it would make much of a difference, but this example proves otherwise: A homeowner who takes out a 20-year fixed mortgage for $300,000 at a rate of 4% will save nearly $95,000 in interest over the life of the loan, compared to a 30-year fixed mortgage at a rate of 4.25%.
The Monthly Payments
If you're looking to refinance, you might think it is a better idea to go for the 15-year mortgage since it has a lower interest rate. It's true, the drop in the interest rate going from a 30-year to a 15-year loan typically is around .75 to 1%, says says Jered Helton, vice president of the Oregon Mortgage Bankers Association, which could offer huge savings when compared to a 20-year loan. But "the advantage of a 20-year loan over a 15-year is that the payment is lower," says Nelson Otero, president of the Southern Los Angeles chapter of the California Association of Mortgage Professionals.
To show this point, Helton brings up this example: "On a $200,000 loan, the difference between a 20- and 15-year loan would be about $190 a month. For most people, that would impact their housing budget, and they might not be able to pay that extra $190." For people who might find it difficult making higher monthly payments with a 15-year refinance, opting for a 20-year loan is an affordable solution to paying off your mortgage faster than a 30-year loan, adds Otero.
Veronica Ondrejech, president of the Central Coast chapter of the California Association of Mortgage Professionals, agrees. She says homeowners could discover that refinancing to a 20-year mortgage can help them reach their financial goals in a full decade less than traditional 30-year home loans. “If they can pay that extra $300 a month for a lower interest rate in the 3’s, that could sway them to refinance and pay off a loan in 20 years instead of 30,” Ondrejech says. At the end of the day, of course, deciding between a 15-, 20-, or 30-year term will come down to what you can comfortably afford on a monthly basis. “Make sure it fits your longtime goal,” Helton says. “Ask about a 20-year loan option, and if the payment is right for you with current and future expenses, then it’s the right term for you.”
Tips for Shopping for a 20 Year Home Loan:
- Ask for the difference in payments between 30 year, 20 year, and 15 year loans. Then, ask about the interest saved over the life of the loan.
- Verify whether the loan has any pre-payment penalties.
- Request a Good Faith Estimate and Truth-In-Lending Statement so that you can better compare competing offers.
- Do your homework and make sure that the lenders and brokers that you are speaking with have a good record with the Better Business Bureau and are in solid standing with their regulators.
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