The Complete Guide to 20 Year Fixed Loans

A 20 year fixed loan is a popular mortgage option for many homebuyers This type of loan has a fixed interest rate and a 20 year repayment term 20 year fixed loans offer a nice balance between affordability and fast paydown compared to other loan terms. In this complete guide, we’ll cover everything you need to know about 20 year fixed rate mortgages.

What is a 20 Year Fixed Loan?

A 20 year fixed rate mortgage is a home loan that you payoff over a 20 year term. The interest rate stays the same or “fixed” for the entire repayment period This means your principal and interest payment won’t change during the life of the loan.

20 year fixed loans are often a good compromise between 30 year and 15 year mortgages. You get a lower interest rate than a 30 year loan, meaning you pay less interest over time. But your monthly payment is also lower compared to a 15 year mortgage for the same loan amount.

Benefits of 20 Year Fixed Loans

There are several advantages that make 20 year fixed rate mortgages a popular choice

• Lower Interest Rate – 20 year fixed loans typically have a lower rate than 30 year mortgages. This means you pay less interest over the life of the loan and can save thousands.

• Faster Repayment – By choosing a 20 year term instead of 30 years, you shave 10 years off the repayment period. This allows you to build equity faster.

• Lower Monthly Payment – The monthly principal and interest payment on a 20 year loan is lower than a 15 year mortgage for the same loan amount. This makes it more affordable.

• Prepayment Flexibility – 20 year fixed loans allow you to pay extra each month to payoff the mortgage early. This can help you save on interest costs.

Drawbacks of 20 Year Fixed Loans

While they have advantages, 20 year fixed mortgages also come with some potential drawbacks:

• Higher Monthly Payment – When compared to a 30 year loan, the monthly payment will be higher with a 20 year term, all else being equal. This may strain your budget.

• Less Buying Power – For a given monthly payment, a 30 year mortgage allows you to qualify for a higher loan amount. So you may be able to buy more house with a 30 year loan.

• Less Cash Flow – Since more of your income goes toward your mortgage payment each month, you have less cash left over for other goals and expenses.

20 Year Fixed Rate Trends

Mortgage rates change daily based on factors like the economy and competition among lenders. Over the past year, 20 year fixed mortgage rates have ranged from about 3% to over 7%.

As of June 2024, the average 20 year fixed rate is around 6.9% according to Bankrate’s national survey of lenders. This is up significantly from early 2022 when rates were closer to 3%. But it’s still lower than the average 30 year fixed rate of about 7.1%.

When shopping for a 20 year fixed loan, it’s important to compare multiple lender quotes to find the best rate. Rates can vary by more than 0.5% between lenders.

How Much House Can I Afford with a 20 Year Fixed Loan?

The amount of mortgage you can qualify for with a 20 year fixed loan depends on factors like your income, debts, credit score, down payment, and the loan limits in your area.

As a general guideline, your total monthly mortgage payment (principal, interest, taxes, and insurance) should be no more than 28% of your gross monthly income. On a $100,000 loan at 6.9%, the principal and interest payment would be around $733 per month.

Down payment is another major factor. Conventional 20 year fixed loans typically require at least 3% down. But options like VA and FHA loans allow down payments as low as 0%. The more you put down, the lower your monthly payment will be.

Our Mortgage Calculator can help estimate how much 20 year fixed mortgage you may qualify for based on your specific situation.

What Credit Score is Needed for a 20 Year Fixed Loan?

To get the best 20 year mortgage rates, you’ll want a strong credit score. Here are the typical credit score requirements:

• Conventional Loans – Generally require a minimum credit score of 620, but scores of at least 720 will get the lowest rates. Some lenders may go as low as 580.

• FHA Loans – Allow credit scores as low as 580, but at least 620 is recommended for the best terms.

• VA Loans – Have flexible credit guidelines. Can qualify with scores around 580 or lower in some cases.

• USDA Loans – No specific minimum credit score, but most lenders look for at least 640.

The higher your credit score, the more likely you are to be approved and the lower your interest rate will be. Take time before applying to review your credit reports and improve your score if needed.

How Much Down Payment is Needed?

Down payment requirements vary depending on the type of 20 year fixed rate mortgage:

• Conventional Loans – Typically require at least 3% down payment. But some lenders accept as low as 3% down.

• FHA Loans – Allow down payments as low as 3.5%.

• VA Loans – Require 0% down for qualified buyers.

• USDA Loans – Also offer 0% down payment options in eligible rural areas.

The more you can put down, the better mortgage terms you can get. Conventional 20 year fixed loans with a down payment of 20% or more allow you to avoid private mortgage insurance (PMI).

How Do I Get The Best 20 Year Mortgage Rate?

Follow these tips to help lock in the lowest rate when getting a 20 year fixed mortgage:

• Shop with multiple lenders – Compare rates from at least 3 different lenders to find the best deal. Focus on comparing Annual Percentage Rates (APRs) which account for fees.

• Improve your credit score – Good credit will qualify you for lower rates. Pay down debts and correct any errors on your credit reports.

• Make a larger down payment – Putting down 20% or more if possible can score you a lower rate.

• Lower your debt-to-income ratio – Lenders look at your total monthly debt payments compared to income. Keeping this ratio low can help your rate.

• Choose a shorter term – 20 year fixed rates are typically lower than 30 year rates from the same lender.

• Pay discount points – You may be able to buy down your rate by paying points upfront to the lender. Each point typically reduces your rate by 0.25%.

Pros and Cons of 20 Year Fixed Loans

Alternatives to 20 Year Fixed Loans

Other home loan options to consider besides a 20 year fixed include:

• 30 Year Fixed – Lower monthly payments but higher interest rate and slower payoff.

• 15 Year Fixed – A faster payoff but with higher monthly payments.

• ARMs – Short-term fixed rates that adjust periodically. Risk of rising payments.

• Interest-Only – Pay only interest for a set period before repaying principal. Higher long-term costs.

• Balloon Mortgages – Fixed payments for a set term before a large balloon payment. Requires refinancing.

The Bottom Line

A 20 year fixed rate mortgage provides an excellent middle ground between affordability, interest savings, and repayment term compared to other loan options. It offers home buyers flexibility in finding the right balance for their budget and financial goals. Just be sure to shop multiple lenders to find the best possible rate for your situation.