20-year mortgages: Getting trendy?
Here’s what you should know about these shorter-term home loans.
By Michele Lerner of HSH.com
© Peter Dazeley/Getty Images
More homeowners are taking a two-pronged approach to refinancing: lowering their interest rate and opting for a shorter-term loan. Although your monthly payments likely will rise if you refinance from a 30-year loan to a 20-year loan, historically-low interest rates have made shorter-term home loans more affordable. (Bing: How low are interest rates right now?)
Matthew Robinson, senior public-affairs specialist for the Mortgage Bankers Association, says 30-year fixed-rate mortgages are still the most popular loan term for purchase and refinance customers, but 20-year mortgages are gaining ground, especially among refinancers. They’re the third most popular loan, behind 30-year and 15-year terms.
Although the MBA does not track applications for 20-year loans, they comprise the bulk of loans in its “fixed-rate loans/other terms” category, Robinson says. The popularity of these loans, especially among refinancers, has grown enormously in the past year alone. The MBA says that “other term” loans represented more than 15% of all refinance applications in August and are up 23.25% compared to 2011. Other-term loans represented just 1.91% of purchase applications in August but increased 13.45% from August 2011.
Patricia Widerman, a senior vice president at BB&T and group mortgage manager for Washington, D.C., and several other regions, says 20-year mortgages represent about 10% of the bank’s conforming, fixed-rate loan volume this year.
Rates
Interest rates for 20-year mortgages are lower than for 30-year loans but higher than rates for 15-year mortgages.
For example, here are the mortgage rates that U.S. Bank offered on Oct. 10:
- 30-year, fixed-rate loans: 3.875%
- 20-year, fixed-rate loans: 3.75%
- 15-year fixed-rate loans: 3.125%
“Borrowers are choosing 20-year home loans over a 15-year loan because the monthly payments are lower, even with a slightly higher interest rate, simply because the loan is amortized over a longer period of time,” Widerman says. “Borrowers who are not completely comfortable with the payments on a 15-year loan can opt for a 20-year mortgage.”
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Here are the monthly payments on a $250,000 mortgage for the three most-popular mortgage terms:
- 30-year mortgage at 3.875%: $1,176
- 20-year mortgage at 3.75%: $1,482
- 15-year mortgage at 3.125%: $1,742
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Qualifying for a 20-year mortgage
Widerman says qualification standards for a 20-year mortgage are the same as for a 30-year or 15-year, fixed-rate loan. The only difference is that your income must be able to cover the higher payment.
Read: The down-payment chronicles
“The only downside to a 20-year mortgage would be that the monthly payments are higher than a 30-year mortgage,” Widerman says. “For borrowers who are nervous about locking themselves into higher payments, a 30-year mortgage may be a better option. They can always make extra payments toward the principal to achieve the same goal of paying off the balance faster without the pressure of being committed to higher payments every month.”
A mortgage-amortization calculator can help you compare your various mortgage options and decide which loan term is best for you
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