20-Year vs. 30-Year Mortgages

February 8, 2012 11 Comments »
20-Year vs. 30-Year Mortgages

It’s time for the first mortgage match-up of 2012.

And because paying down the mortgage early seems to be so en vogue these days, let’s take a look at “20-year mortgages vs. 30-year mortgages.”

The most common type of mortgage is the 30-year fixed. It amortizes over 30-years, and the mortgage rate never changes during that time.

Each mortgage payment is the same every month, so there isn’t any fear of interest rates resetting higher and pushing a homeowner towards foreclosure.

This relative simplicity and safety explains their popularity, but they aren’t the end all, be all solution for every homeowner out there.

30-Year Mortgages Have Drawbacks

When it comes down it, 30-year mortgages have some drawbacks, with the most obvious one being the long amortization period. They also come with the highest interest rates relative to other loan programs.

And since the mortgage takes so very long to be paid off, more interest is paid. Think of it this way. If you borrowed money from a friend and asked to pay it back over 30 years, they would probably say no.

If by chance they agreed, they’d want to charge you a higher rate of interest. And because you’d be paying it back so slowly, you’d pay a lot more interest over that time.

Assuming your loan amount is large, it could be the difference of many thousands of dollars.

Look to a Shorter-Term Mortgage

So what are homeowners to do? Well, the most common solution to this ”problem” is to look at a shorter-term mortgage.

And while the 15-year fixed is the most common alternative, it comes with its own drawback, namely a much higher monthly mortgage payment.

In other words, not every homeowner can just say, “I want to pay my mortgage off faster” and switch to a 15-year fixed.

Fortunately, there are options in between, with the most common being the 20-year fixed mortgage.

A 20-year mortgage sheds 10 years off the typical loan term, and results in much less interest paid throughout its duration.

Let’s look at an example to illustrate the savings:

Loan amount: $200,000

30-year fixed @4%
Monthly mortgage payment: $954.83
Total interest paid: $143,738.80

20-year fixed @3.75%
Monthly mortgage payment: $1,185.78
Total interest paid: $84,587.20

As you can see, the interest rates aren’t much different, though the 20-year mortgage does price a little bit lower than the 30-year fixed.

Still, the homeowner with the 30-year mortgage pays more than $200 less each month.

But the 20-year mortgage results in interest savings of nearly $60,000! This borrower would also own their home free and clear an entire decade earlier.

This can be pretty beneficial, especially if you plan to retire soon and anticipate being on a fixed income.

The 20-year fixed is also a good alternative because you won’t break the bank making your mortgage payment each month.

But again, the payment will be higher than the 30-year payment, which could stretch you thin or limit what you can afford if you’re buying a home.

Go With a 20-Year Fixed Mortgage to Stay on Course

If you’re currently in a 30-year fixed, and don’t want to reset the mortgage clock, you can refinance to a 20-year fixed to stay on course without even paying more each month.

Because mortgage rates are so low at the moment, you may be able to refinance from a 30-year to a 20-year fixed mortgage and even lower your monthly payment.

Also keep in mind that there are other alternatives outside the 15, 20, and 30-year options.

And some banks even allow you to choose your own mortgage term, whether it’s a 17-year fixed or a 24-year fixed.

So be sure to look at all available options to see which makes the most sense financially for your unique situation.

Also ask yourself why you want to pay the mortgage off early. There may be a better place for your money.

Read more: 30-year fixed vs. 15-year fixed.

Compare Today’s Mortgage Rates

11 Comments

  1. William M. Jacobs February 8, 2012 at 6:20 pm -

    The author is correct as far as he goes, but he neglects to share the additional option that the 30 year fixed rate loan as well as most other loan programs also allow for a partial pre-payment. Therefore, a borrower can add whatever they feel they can afford each month or whenever they have additional resources and reduce their principal balance accordingly.

  2. Chris February 9, 2012 at 11:10 am -

    I refinanced my Wells Fargo 30 year mortgage from 6.5% to my credit union 20 year mortgage at 4.2%, paying now about $80 less a month and saving a huge amount of interest in the long run! I shaved 5 years from my mortgage sentence with no points or closing costs, and no prepayment penalties. Shop around.

  3. Guardian September 4, 2012 at 9:16 pm -

    My advice: If you need a 30 year note in this economic climate, you’re buying too much house! Do yourself a favor and do nothing more than a 15 year loan. I’m going to refinance again, from 15 to 10, going from 4.375 to 2.75, and will dave myself $42,000 in interest alone over the next 10 years. Oh, and my payments do not go up, they stay the same.

  4. Colin Robertson September 5, 2012 at 8:56 am -

    Guardian, that’s all good and well, but some homeowners aren’t interested in rapidly paying off their mortgage. They may have a better use for their money. So it’s not always an affordability issue.

  5. Joe November 13, 2012 at 12:18 pm -

    Good advice. For me though, I take the longest mortgage available with the lowest payment and invest the extra dollars. I have only avergaed about 5% a year in my investments while paying on average 6% over the last 10 years, however the 5% has grown tax free while the 6% is actually less due to the mortgage tax write off. Also, I would like to think that the market will eventually turn up and 10 years of “buying low” will pay off in the long run.
    You only live once and need to take some risk.

  6. Harlan June 25, 2013 at 2:44 pm -

    The only downside to the 20-year fixed is that the interest rate isn’t much cheaper than the 30-year. But at least it amortizes a lot faster, saving the borrower a ton of interest over time…

  7. Val August 14, 2013 at 11:11 am -

    Yep…don’t opt for a 20-year fixed if you want a lower interest rate, as it will probably be the same as the 30-year. However, you will pay a lot less interest over the loan term. Just be sure you can handle the larger monthly payment, because there’s no going back once it’s done. If you can’t handle it, stick with a 30-year and make extra payments when you can to reduce interest expense.

  8. Mel August 18, 2013 at 1:24 pm -

    If you’re thinking about a 20-year loan you might as well just go with a 15-year instead. You’ll actually get a lower interest rate and pay off your mortgage five years earlier. And the payment shouldn’t be too much higher. Just my two cents.

  9. Big Al September 7, 2013 at 9:09 pm -

    While you’re at it, why not get a 10-year fixed. Not everyone can afford a 15-year term Mel! Or a 30-year for that matter.

  10. Hue F. October 22, 2013 at 9:51 am -

    Go with the 20-year and save a ton of interest. Who cares if the interest rates are the same.

  11. N.C. April 19, 2014 at 4:23 pm -

    If it’s a question of affordability, select the 30-year, make larger payments as if it were a 20-year fixed and drop back to the 30-year payments if your budget eventually doesn’t allow it.

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