3 Reasons to Pick a 20-Year Mortgage

Many people have become successful by standing out and going against the herd. Homeowners may achieve similar success by taking the same approach.

Only 1% of new mortgages fall into the “other” category, which includes the rarely used 20-year mortgage. The overwhelming majority of homeowners go the more standard 30-year route.

In the video segment below, Motley Fool analysts Nathan Hamilton and Kristine Harjes discuss three reasons a 20-year mortgage may be best for new homebuyers and refinancers alike.

Kristine Harjes: If you’re considering a mortgage, you’re probably thinking, should I get a 30-year or a 15-year? If you’re like 90% of homeowners, you’re going to choose the 30 year mortgage, but say you don’t want to do 30 whole years of paying down a mortgage, but the 15-year has too high of a payment. There is actually something called a 20-year mortgage that allows you to get a little bit of the best of both worlds.

Nathan Hamilton: Yeah, and they’re somewhat unpopular. I don’t know if there’s a reason behind, that but essentially, 1% of mortgages go with what they call the “other” category. Within that category is 20-year mortgages. Three reasons to pick a 20-year mortgage. First, you’re going to get a lower rate because the shorter the time frame for your mortgage, the lower the rate. A 15-year will be less than a 20-year, 20-year less than a 30-year. The actual number, if you look at it, is right now, you can get a 30-year mortgage for just above 4%, and a 20-year, you can actually bring that down to 3.75%, which seems small, but it’s actually a big impact on what you pay each month — and the total cost of your mortgage over 30, 20 years.

Harjes: As we’ve talked about, every little bit counts.

Hamilton: Yep. If you look at the actual savings, this is reason No. 2, is an example of buying a $309,000 mortgage. You’re looking at a savings of just above $91,000 over the term of that loan compared to a 30-year mortgage. Just for getting that lower rate of 25 basis points, or a quarter of a percentage point.

Harjes: Another point that we want to bring up is if you’re refinancing, this might be a very good option for you to consider.

Hamilton: Yeah, because some people with a 30-year mortgage, they refinance, get the lower rate, and they stick with the 30-year mortgage, and what that does is it starts the amortization period over again. You’re incurring a lot of interest charges early in the loan. But if you’re going from a 30-year mortgage, you’ve reduced your rate, and you go to a 20-year mortgage, maybe you have the same payment, but you’re decreasing the timeline of that loan pretty significantly and reducing your cost.

Harjes: Whether you’re looking to refinance or if you’re looking to originate a new mortgage, go to our mortgage center at fool.com/mortgages, and you can compare mortgage rates and see just how much a 20-year mortgage could save you.


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