A Complete Guide to 20-Year Fixed-Rate Mortgages
While the most common fixed-rate mortgage terms are 15 years and 30 years, those looking for more flexibility will be pleased to know there’s the option of going somewhere in the middle. A 20-year fixed-rate mortgage offers a quicker payoff than a 30-year plan but lower payments than a 15-year term.
Want to know if it’s the right choice for you? We’ll run through everything you need to know.
What is a 20-year Fixed-Rate Mortgage?
A 20-year fixed-rate mortgage has two key features. It guarantees a consistent interest rate for its full loan term, and the loan term in question lasts for twenty years.
In other words, after those twenty years end, you’ll own your home outright if you make all payments on time.
It broadly works like any other fixed-rate mortgage, but its loan term affects who a 20-year fixed-rate mortgage is appropriate for.
How Does a 20-Year Fixed-Rate Mortgage Work?
A 20-year fixed-rate mortgage involves the following:
- Down-payment. A sum of money paid in advance is deducted from the loan balance to work out monthly payments. It’s typically at least 10% of the low value.
- Principal. The remaining loan balance after the down payment decreases over the loan's duration.
- Interest rate. The mortgage lender determines an APR depending on various factors.
- Term length. How long does the loan last (in this case, 20 years)?
- Monthly payments. The amount you pay each month worked out by considering the above.
Depending on their circumstances, different borrowers can expect different numbers for all of the above (except for the term length, which will always be 20 years).
Mortgage lenders often offer borrowers with high credit scores lower interest rates since they’ve already provided a solid history of their ability to repay. A “good” credit score is generally classed as 670 or above.
Similarly, borrowers who make a more significant downpayment often have access to better mortgage deals. However, a downpayment isn’t necessary for certain loan types.
Yet the borrower's circumstances aren’t the only factors that affect mortgage terms—current market conditions can also play a significant role. In certain climates, all interest rates are lower, and mortgage rates are no exception. The reverse is also true.
There can also be some variation between different parts of the country. For instance, some states are subject to unique laws and regulations that can increase monthly payments due to their impact on insurance and taxes.
20-Year Fixed-Rate Mortgage Example
Now that we’ve covered the basics let’s move from theory to practice.
Take the example of a house worth $250,000, just over the average price for a starter home in the USA. We’ll now look at the breakdown of monthly payments with mortgage insurance (due to a smaller downpayment) and without mortgage insurance (due to a larger downpayment).
With Mortgage Insurance
Mortgage insurance applies when a borrower puts down a down payment below 20%. Let's take a detailed breakdown of how mortgage payments for a 20-year fixed-rate mortgage would look with a 10% deposit.
First, we need to work out the loan principal. With a down payment of $25,000, that would be $225,000.
Since a 20-year mortgage is paid over twenty years, that means 240 months of monthly payments. 225,000 divided by 240 is $937.5.
Assuming an interest rate of 6%, this takes monthly payments up to a hefty $1,612.
Then, there are property taxes, home insurance, and private mortgage insurance (PMI). These can vary significantly between areas, but US Bank estimates $583 for the first two and $74 for the latter based on averages across the country.
We need to add everything together to work out total monthly payments.
$1,439 + $583 + $74—that’s $2,270.
Without Mortgage Insurance
Now, let's look at how the monthly payments would change if you didn't have to pay private mortgage insurance. This is possible when using a down payment of 20% or more.
In this example, a 20% down payment would be $50,000, resulting in a loan principal of $200,000.
That would take the monthly payments down to $1,433.
Property taxes and home insurance would remain the same.
Meanwhile, the total monthly payments would be $1,433 + $1583, which is $2,016.
Types of 20-Year Fixed-Rate Mortgage
All 20-year fixed-rate mortgages have certain things in common — they all have a 20-year loan term and a fixed interest rate, for instance. However, a few different types are available, which we’ve detailed below.
Only some borrowers can take out any kind of mortgage loan they want. Some are subject to specific eligibility criteria, and the lender's selection may vary.
Conventional vs Government-Backed Loans
So far, we've assumed the borrower is taking out a “conventional loan.” This simply means that the borrower is responsible for paying off their mortgage and doesn't receive any support from the government or other parties.
However, not all 20-year fixed-rate mortgages are conventional loans — another possibility is the case of government-backed loans.
As the name suggests, taking out a government loan means that the government offers backing and assumes the responsibility of making payments if the borrower fails to pay.
This gives lenders more security and encourages them to offer loans they may not have otherwise. Types of government-backed loans include:
- Federal Housing Administration (FHA) loans
- Department of Veterans Affairs (VA) loans
- United States Department of Agriculture (USDA) loans
Conforming vs Non-Conforming Loans
A 20-year fixed-rate mortgage can be conventional, conforming, or non-conforming. The difference is that conforming loans meet the funding guidelines of Fannie Mae and Freddie Mac.
Jumbo Loans
Finally, there are jumbo loans. These have the word “jumbo” due to the high amount they allow customers to borrow.
Conventional loans typically require a down payment of at least 10%, but jumbo loans waive this requirement.
Because of this, they're only available to borrowers with a strong credit history.
Pros and Cons of a 20-Year Fixed-Rate Mortgage
Is a 20-Year Fixed-Rate Mortgage a Good Idea?
Although 20-year fixed-rate mortgages may be somewhat unusual, they can be a great choice. They offer lower monthly payments than 15-year fixed-rate mortgages while allowing you to pay your loan off more quickly than a 30-year fixed-rate mortgage, providing the perfect in-between.
Consider a 20-Year Fixed-Rate Mortgage If:
- You want to pay off your house fast. While a 20-year term isn’t quite as short as a 15-year term, it does offer the chance to pay off your mortgage relatively quickly.
- Stability matters to you. As with any fixed-rate mortgage, a 20-year fixed-rate term gives you the stability of knowing that your monthly payments won’t suddenly shoot up due to interest rate increases.
- You can afford higher payments. The short loan term of a 20-year mortgage means you’ll pay more each month than you would when using a 30-year loan for the same loan balance.
Is Now a Good Time for a 20-Year Fixed-Rate Mortgage?
As of June 8, 2024, the average 30-year fixed-rate mortgage has an average interest rate of 6.94%. However, these numbers constantly change, so it’s important to talk to a mortgage advisor or check the latest rates.
These compare to average mortgage rates of 7.14% and 6.56% for 30-year and 15-year mortgages, showing that the interest rates for a 20-year term fall between the two. You can track the daily mortgage rates for 15-year and 30-year fixed-rate mortgages on FreeRateUpdate.
FAQs
How Does a Fixed-Rate Mortgage Compare to an Adjustable-Rate Mortgage?
While fixed-rate mortgages offer an interest rate for the entire mortgage term, adjustable-rate mortgages have an interest rate that fluctuates over the loan term. The borrower signs up for one mortgage rate, which changes periodically based on overall economic conditions.
When interest rates in the US economy are high, they will pay higher mortgage rates, and vice versa.
Adjustable rates are often more competitive over the short term, but the borrower risks accepting a much higher mortgage rate later.
Is a 20-Year Better than a 30-Year Mortgage?
A 20-year mortgage is better than a 30-year loan for borrowers who prioritize paying off their mortgage as quickly as possible and minimizing interest payments.
Is a 20-Year Mortgage Better than a 15-Year Mortgage?
A 20-year mortgage is better than a 15-year mortgage for borrowers who want lower monthly payments.
What is a Good Mortgage Rate for a 20-Year Fixed?
Considering the current average rate for a 20-year fixed is around 7%, anything at this rate or lower is competitive. However, for a borrower with a poor credit score, a rate higher than this could still be considered “good.”