The 30-year fixed-rate mortgage has traditionally been the most popular one used by homebuyers in the past. It still dominates the housing market, especially for the first-time homebuyers as it provides security of a fixed payment and also the flexibility to afford a larger loan amount. The second most common loan is the 15-year fixed-rate mortgage which attracts homeowners who are refinancing their home loans. But, the third option which is becoming popular in recent years is the 20-year fixed-rate mortgage because it provides a happy medium between a long-term and a short-term fixed mortgage loan.
Today’s generation should opt for a 20-year fixed-rate rather than a 30-year fixed-rate mortgage as it has several advantages.
Save On Total Interest
The biggest advantage of a 20-year mortgage over a 30-year mortgage is the significant interest saved over the life of the loan. Interest rates are generally 0.5% lower on a 20-year term as compared to a 30-year one. For example, if you take a mortgage loan of $200,000 for a 30-year fixed term and the interest rate is 4.5%, your total interest amount over the loan period will be $364,813 and your monthly payment $1,013.37. But if you take the same amount of loan for a 20-year fixed period and the interest is 4% then your total interest amount over the loan period will be $290,870 and your monthly payment $1,211.96.This means you will save $73,943 on total interest with an increased monthly payment of only $199 when purchasing or refinancing into a 20-year mortgage over a 30-year one.
Pay Off Your Loan Faster
Another advantage of deciding on a 20-year fixed-rate mortgage is that you will be out of debt 10 years faster than a 30-year fixed- mortgage. This can be a great benefit to young homebuyers as they can be free of the loan just when their children have to attend college and have more cash flow to help pay for their tuition. It can also help a borrower who is refinancing into another 30-year mortgage as it can be refinanced into a 20-year one, and help on the payoff goal rather than start all over again with a new 30-year fixed- mortgage.
Match The Payoff To Your Retirment Goals
The 20-year fixed-rate mortgage is a great benefit especially for homebuyers who are planning to retire in the next 20 to 25 years. Choosing a 20-year mortgage would keep them on track and they would pay off their loan before retirement. But if they opt for a 30-year mortgage then they would delay the potential payoff of their mortgage until after they retire. Therefore, taking a 20-year mortgage will match their retirement plans.
A 20-year mortgage can be a better alternative to a 15-year mortgage for those homebuyers who want to pay off their mortgage faster but cannot afford to make the higher installment payments of a 15-year mortgage. With a 20-year mortgage, they will still be mortgage-free 10 years earlier as compared to a 30-year loan, and also pay the loan off even earlier by making extra payments.
Build Your Home Equity Faster
A 20-year mortgage has a lower interest rate and higher payment amount which will help you build your home equity faster. When you make a mortgage payment each month, a part of it goes towards real estate taxes and homeowners insurance, a portion towards interest and the remainder towards your principal balance. So, with a 20-year mortgage with its lower interest rate and higher payment amount will help you build home equity faster than a 30-year mortgage because you are paying down the principal balance quicker.
No doubt a 30-year mortgage is an attractive option due to its lesser monthly payments. But, if you can afford it you should consider breaking away from the crowd and go in for a 20-year mortgage as it can mean saving thousands of dollars in interest, building your home equity faster, obtaining better interest rate terms and enjoying your retirement years without the burden of a home loan.