The Ins and Outs of 25 Year Home Loans

If you’re in the market for a home loan, you may be weighing your options between a traditional 30-year mortgage and something with a shorter term like a 15-year loan. But did you know there’s another option that falls right in the middle? The 25-year mortgage offers a nice balance of low monthly payments and faster payoff compared to the 30-year loan.

In this article, we’ll take an in-depth look at 25 year home loans. We’ll cover how they work, who they are best suited for, pros and cons, and more. By the end, you’ll understand if a 25-year mortgage is right for your home buying or refinancing needs.

What Exactly is a 25 Year Home Loan?

A 25-year mortgage is a home loan with a 25 year term meaning it takes 25 years to fully pay off the loan. This falls right between the traditional 15 and 30-year mortgage terms.

With a 25-year fixed-rate mortgage, your interest rate stays the same for the entire 25 year loan term. Your principal and interest payments will be the same each month. This provides predictability in your monthly housing costs.

25-year mortgages can be used to purchase a home as your primary residence or investment property. They are also commonly used to refinance an existing mortgage.

Who Are 25 Year Home Loans Best For?

A 25-year mortgage offers a nice middle ground between 15 and 30-year home loans. Here’s an overview of who 25-year mortgages work best for:

• Homebuyers who want lower monthly payments than a 15-year loan, but faster payoff than a 30-year. The 25-year reduces total interest paid over the life of the loan compared to a 30-year mortgage.

• Homebuyers who want payment stability that fixed rates provide, but may move in less than 30 years.

• Homebuyers who want flexibility in case they fall on hardship and need to lower monthly payments. This can be done by refinancing to a 30-year term.

• Borrowers seeking to refinance their existing 30-year loan to a lower rate and shorter term to build equity faster

• Borrowers who want to refinance their 15-year loan to lower their monthly payments

In short, a 25-year mortgage can be ideal for those who want a shorter term than a 30-year, but don’t want as large of a monthly payment as a 15-year. It provides a nice balance.

How Do You Qualify for a 25 Year Home Loan?

Qualifying for a 25-year mortgage is similar to other standard loan programs like 30-year fixed mortgages. Here are the basic requirements:

Down payment

• Conventional loans require a minimum 3-5% down payment
• FHA loans require a minimum 3.5% down payment
• VA loans require 0% down for qualified buyers

Credit score: A minimum credit score in the 580-660 range is generally required. The higher your score, the better rate you can qualify for.

Debt-to-income ratio Your total monthly debt payments, including the new mortgage, ideally should not exceed 45% of your gross monthly income.

Mortgage insurance: If your down payment is less than 20%, you’ll need to pay mortgage insurance. This is bundled into your monthly payment.

Always check with lenders on exact qualification requirements as these can vary. The good news is 25-year mortgages have relatively low barriers to entry for eligible home buyers.

Pros and Cons of 25 Year Home Loans

Like any financial product, 25-year mortgages come with both advantages and disadvantages. Let’s look at the key pros and cons:

Pros

• Shorter term than 30-year means you pay off mortgage faster and pay less interest

• Lower monthly payment than 15-year mortgage provides flexibility in budget

• Fixed rate provides predictability in housing costs each month

• Potentially allows borrowing up to 97% of home’s value with right program

• No prepayment penalties if you pay off mortgage early

Cons

• Higher monthly payment than 30-year mortgage

• Higher interest rate than 15-year mortgage

• Must qualify based on ability to repay over 25 years

• Refinancing to lower rate often requires restarting at 30-year term

Weighing the pros and cons will help you decide if a 25-year term works for your situation. For many homebuyers, the 25-year hits a sweet spot between cost and term length.

How Do Interest Rates Compare for 25 Year Loans?

Interest rates on 25-year fixed mortgages tend to fall right between 15 and 30-year loans:

• 30-year fixed rates are typically the lowest
• 15-year fixed rates are usually the highest
• 25-year fixed rates land in the middle

For example, with current rates around 7% for 30-year loans and 6.5% for 15-year loans, 25-year rates are roughly 6.75%.

The shorter term length of a 25-year mortgage offsets some of the savings from a lower 30-year rate. Run the numbers to see whether lower monthly payments of a 30-year or lower total interest costs of a 25-year work better for your budget.

How Do 25 Year Loan Payments Compare?

One big consideration when choosing between loan terms is the monthly payment. Let’s look at estimates on a $300,000 mortgage amount:

• 30-year: $1,610 per month
• 25-year: $1,830 per month
• 15-year: $2,210 per month

As you can see, the 25-year mortgage payment falls nicely between a 30 and 15-year loan. The 25-year offers monthly savings over a 15-year term, while paying off faster than a 30-year loan.

Of course, actual payments depend on your loan amount, interest rate, taxes, insurance and other factors. But this illustrates the payment savings 25-year loans provide versus shorter terms.

Tips for Getting the Best 25 Year Mortgage Rate

If you’ve decided a 25-year mortgage is right for you, here are some tips to score the lowest rate possible:

• Shop around with multiple lenders to compare rates and fees. Even a small rate difference can impact total interest paid over 25 years.

• Get pre-approved for a loan before house hunting. This shows sellers you are serious and can give negotiating leverage.

• Ask about discounts for having other accounts with the lender or paying via auto-debit. Every little bit helps.

• Have a down payment of at least 20% to avoid private mortgage insurance that adds to monthly costs.

• Boost your credit score as much as possible by paying bills on time and lowering credit utilization.

• Consider timing rate locks wisely if closing more than 30-60 days out. Lock too early and you could miss out on rate drops.

Putting in the work upfront to secure the best possible deal on your 25-year loan can really pay off over the long run.

The Bottom Line on 25 Year Mortgages

While not as common as 15 or 30-year loans, a 25-year mortgage can be an excellent choice for the right homebuyer or refinancing homeowner. You get the perks of a lower monthly payment than a 15-year loan, while taking advantage of a shorter term than a 30-year mortgage to pay off your home faster and save on interest.

Just be sure to run the numbers thoroughly and compare offers to choose the best loan for your unique financial situation. With mortgage rates still near historic lows, it’s a great time to lock in a 25-year fixed rate mortgage if the term meets your needs. This provides long-term stability in your monthly housing costs and can help you reach homeownership goals sooner.