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Four reasons to consider a 20-year mortgage

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The 30-year fixed-rate home mortgage dominates the housing market, particularly for first-time buyers who appreciate the ability to extend their home loan payments for the longest possible term.

The second most common fixed-rate loan term is 15 years, but many lenders also offer loan terms of 10 or 20 years. Sometimes lenders even offer a personalized term chosen by the borrower.

“There are quite a few reasons I feel more people should refinance or purchase into a 20-year fixed-rate mortgage rather than looking at a 30-year or a 15-year fixed rate mortgage,’’ Jerry Robinson, broker/owner of 1st Choice Mortgage Co. in Meridian, Idaho, said in an e-mail.

Here are four reasons to consider a 20-year mortgage, according to Robinson:

Save on interest. The most obvious reason is that the interest rate of a 20-year mortgage is typically one-fourth of one point to three-eighths of one point lower than a 30-year fixed mortgage. This means, on an average, a person will save a significant amount of interest when either purchasing or refinancing into a 20-year mortgage compared with a 30-year. Because of a shorter loan term and a lower interest rate, on a $280,000 loan amount, a borrower can save approximately $85,000 in interest over the life of the loan.

Pay off the loan faster. When a borrower is refinancing to get a lower interest rate, instead of taking their original 30-year mortgage and refinancing it into another 30-year mortgage, they’re able to take their original 30-year mortgage and refinance into a 20-year mortgage, which would potentially keep them on their payoff goal. Thus, they don’t have to start all over.

Match the payoff to retirement goals. Let’s say a borrower is in their late 30s or 40s, and their plan is to retire in their 60s. Applying for a 30-year mortgage would push their potential payoff of their house into their 70s. Choosing a 20-year mortgage would keep them potentially on track for having their house paid off in their 60s.

Affordable payments. A 20-year mortgage is a good alternative to a 15-year mortgage, as many home buyers can’t stretch their budget to make the higher payments required to pay off a mortgage in 15 years, but yet they want to pay off the home faster. The borrower is still paying off the loan in 10 years less than a 30-year mortgage, and if the borrower ever wanted to, they have the ability to make extra payments.

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