Everything You Need to Know About 20-Year Home Loans

When getting a mortgage, one of the biggest decisions is choosing between loan terms. While 30-year mortgages are most common, 20-year home loans are gaining popularity for good reasons. In this comprehensive guide, we’ll explain what 20-year mortgages are, their pros and cons, current rates, and how to decide if this loan term makes sense for you.

What is a 20-Year Mortgage?

A 20-year mortgage is a fixed-rate home loan with a 20-year amortization schedule. This means it is completely paid off in 20 years through equal monthly installments covering principal and interest.

The interest rate is fixed for the full 20 years, unlike adjustable-rate mortgages where the rate fluctuates Your principal and interest payment stays the same over the life of the loan

20-year mortgages are an alternative to the standard 30-year home loan. They offer a nice balance – lower interest rates than 30-year loans, but more affordable monthly payments than 15-year mortgages.

Current 20-Year Mortgage Rates

As of July 2024, the average interest rate for a 20-year fixed-rate mortgage is around 6.9% according to Bankrate’s national survey of lenders. This is about 0.2 percentage points lower than the average 30-year fixed rate.

Compare offers from multiple lenders to find the best 20-year rate for your situation. Locking in today’s still-low rates could mean big interest savings over the loan’s lifetime.

Pros of 20-Year Home Loans

Compared to 30-year mortgages, 20-year home loans have some clear advantages:

• Lower interest rate – You’ll typically get a rate 0.25 to 0.5 percent lower than a 30-year mortgage. This adds up to thousands in interest savings.

• Faster equity buildup – With equal monthly payments, you’ll pay down the principal much quicker and build home equity faster. This provides financial flexibility if you want to tap equity later via a refinance or home equity loan.

• Pay off mortgage sooner – You’ll be mortgage-free 10 years earlier than a 30-year loan, freeing up cash flow for other goals in your 40s or 50s.

• Forced savings – The accelerated amortization schedule helps you build wealth faster through home equity. It’s a disciplined way to save that many 20-year loan borrowers appreciate.

Cons of 20-Year Home Loans

The tradeoffs that come with a 20-year mortgage include:

• Higher monthly payment – With 10 fewer years to pay off the balance, your monthly mortgage costs will be about 25 percent more than a 30-year loan for the same amount borrowed. Make sure this fits your budget.

• Less flexibility – If you hit financial trouble, it may be harder to cover the larger required payment each month. You have less wiggle room than a 30-year mortgage offers.

• Potentially less buying power – Since lenders base loan approval on your debt-to-income ratio, a higher monthly payment could limit how much you can borrow.

• More interest upfront – In the early years, your payment goes more toward interest. You won’t start building equity as quickly as with a 30-year loan.

How Much Are Closing Costs on a 20-Year Mortgage?

Closing costs are very similar between 20- and 30-year mortgages, averaging 2-5% of the total loan amount. On a $250,000 loan, expect around $5,000 to $12,500 in closing fees.

Common costs include origination fees, appraisal fees, title insurance, recording fees, taxes, and discount points if you buy the rate down. You can pay costs upfront or roll them into the loan amount through higher monthly payments.

Shop around with lenders as closing fees can vary. Compare total origination charges and third-party fees listed on Loan Estimates. A lower rate may not be the best deal overall if fees are much higher.

20-Year Mortgage Payment Example

Let’s look at sample monthly payments on a 20-year $250,000 mortgage in today’s market:

Loan amount: $250,000

Interest rate: 6.5%

Principal and interest: $1,675

Property taxes: $300

Homeowners insurance: $100

Private mortgage insurance: $125

Total monthly payment: $2,200

The payment is about $400 higher than a 30-year mortgage for the same loan amount and rate. But you save over $60,000 in interest and build equity much faster.

Use an online calculator to estimate payments for different loan amounts, rates, taxes and insurance.

How to Get the Best 20-Year Mortgage Rate

Follow these tips to score the lowest rate when getting a 20-year home loan:

• Check your credit – Good credit scores in the 670+ range qualify you for the best rates. Review all three credit reports and dispute any errors.

• Reduce debt – Lenders will look at your total monthly obligations. Pay down credit cards and other debts to lower your debt-to-income ratio.

• Shop multiple lenders – Compare rate and fee quotes from lenders including banks, credit unions and online lenders. Look for the lowest APR.

• Get pre-approved – Being pre-approved shows sellers you’re a serious buyer. Locking in a rate upfront can protect you from rate hikes later.

• Make a larger down payment – Down payments as low as 5% are allowed, but 20% down gets the best rates and avoids private mortgage insurance.

• Buy discount points – Paying points upfront reduces the interest rate over the loan’s term. Do the math to see if it’s cost effective based on how long you plan to stay in the home.

Should I Get a 20-Year or 30-Year Mortgage?

Deciding between a 20- and 30-year fixed-rate mortgage involves tradeoffs between monthly payments, interest costs, equity buildup, and the timeline for paying off your home. Consider factors like:

• Your budget – Will you be comfortable with the higher monthly payment of a 20-year loan? Make sure to account for future expenses too.

• Your timeline – How long do you plan to live in this home? Are you looking to build equity quickly for a future move?

• Interest savings – Do you want to maximize interest savings, even if it costs more per month? Use a mortgage calculator to compare scenarios.

• Flexibility – Does conserving monthly cash flow matter more to you than fast equity buildup? Or vice versa?

• Future plans – Will you look to tap home equity within the next 10 years via a refinance or home equity loan/line?

For most homeowners, the 30-year mortgage makes the best sense long-term. But disciplined borrowers who value faster equity accumulation may prefer a 20-year loan. Crunch the numbers for your situation.

Alternatives to 20-Year Mortgages

Beyond standard 30-year loans, other alternatives to consider include:

• 15-year mortgage – Offers an even lower rate than a 20-year loan but requires the highest monthly payment.

• Adjustable-rate mortgage (ARM) – Starts with a low fixed teaser rate that later adjusts based on market rates. Riskier but can make sense if you plan to move before the adjustment period.

• FHA, VA and USDA loans – Government-backed loans requiring lower down payments but added mortgage insurance. Can be a good option for lower credit borrowers.

• Jumbo mortgage – For luxury homes above conforming loan limits. Offers fixed rates but usually requires excellent credit and larger down payment.

• Paying a 30-year mortgage faster – Get a lower monthly payment then pay extra principal each month to mimic a 20-year schedule. Allows flexibility if cash flow tightens.

The Bottom Line

A 20-year fixed-rate mortgage offers a nice middle ground between affordability and fast equity buildup. While not as popular as 30-year loans, they make sense for certain buyers. If you value the forced savings and quicker timeline to pay off your home, crunch the numbers to see if a 20-year mortgage aligns with your budget and financial priorities.