Refinancing your loan means that you’re paying off your existing mortgage loan with a new loan, which often comes with a better interest rate or term. There are several options for refinancing, including the more popular 30-year and 15-year mortgage loans.
What you may not know, though, is that there’s also an option for a 20-year mortgage loan. While 20-year mortgage loans aren’t as popular as the other mortgage loan options, these types of loans offer a few key benefits when compared to other types of mortgages.
Right now, refinance rates are low due to the COVID-19 pandemic. On average, a rate below 3% on a 30-year mortgage is a steal, but some rates on mortgages are even lower than 3% right now — and even a slightly lower rate can have a significant impact on what you pay over the life of your loan.
Today’s 20-year mortgage and refinance rates
The coronavirus pandemic has profoundly impacted the housing and mortgage industry. Mortgage rates plunged to record lows as COVID-19 wreaked havoc on the nation’s economy. At the start of the pandemic in February, the average rate on a 30-year mortgage fell almost half a percentage point in just 10 days — and they’ve stayed low since.
Today, the average 20-year refinance rates sit at an average of 2.750% with a 2.845% APR as of December.
[ See: The Typical Closing Costs On a Refinance ]
Experts expect mortgage rates to stay low through 2021 while the economy recovers from the hit it sustained by the pandemic. So, if you’ve been looking to refinance your home loan, the current 20-year mortgage and refinance rates may be too good to pass up.
What is a 20-year fixed-rate mortgage?
A 20-year fixed-rate mortgage loan is similar to a 30-year fixed-rate mortgage loan — but it has a shorter term. A 20-year fixed-rate loan gives borrowers a fixed interest rate throughout the entire loan term. That means your interest rates won’t vary and your payments will remain the same for 20 years.
As mentioned, although 30- and 15-year mortgages are more common than 20-year mortgages, interest rates are typically lower on 20-year loans than on 30-year loans. There’s also the bonus of being out of debt 10 years faster if you opt for this type of mortgage loan.
If you compare a 20-year mortgage with a 15-year mortgage, you’ll find that your monthly payments tend to be lower with a 20-year loan, as the term of the loan is longer. There are five extra years to spread out the monthly payments, which could make a 20-year loan the more affordable option between the two.
During the first years of your repayment schedule, a larger portion of your payments will go towards interest. In the later years, more of your monthly payment will go toward principal. This is called mortgage amortization, and it’s how your loan is paid down. You’re required to pay down what you owe in interest to the lender first, and once you’ve done that, you’ll start chipping away at more of the principal.
Ready to get started with this type of loan? Compare the best 20-year refinance rates available today.
|30-year fixed loan||2.750%||2.817%|
|20-year fixed loan||2.750%||2.845%|
|15-year fixed loan||2.250%||2.372%|
Source: US Bank. Rates current as of December 9, 2020.
How to refinance a 20-year mortgage
When you refinance your mortgage, you replace your current loan with a new loan — often with lower interest rates and new terms.
If you want to refinance your current loan to a 20-year mortgage loan, the first thing you need to do is make sure this type of loan is right for your needs. You also need to make sure you can afford the payments. You’re shaving off 10 years from the loan if you’re refinancing from a 30- to a 20-year loan, so you need to make sure it fits your budget before you commit.
The next steps you take to refinance your loan and get the best 20-year mortgage rates are:
- Research the associated costs with refinancing to decide if refinancing your loan is the best move for your needs. Take into account the closing costs and other fees you might face when refinancing.
- Check your finances and your credit score to make sure there are no errors. If you find any, be sure to dispute them and finish the process before applying to refinance. Even minor issues could cause you to pay more due to a higher interest rate, so comb through your reports carefully to make sure they don’t reflect any negative or incorrect information.
- Find out what equity you have in your home. To find out the equity in your home, subtract the current balance on your mortgage from your home’s current value. This should give you a solid idea of what the equity is in your home.
- Compare mortgage refinance rates online, through your bank or at a local credit union. Make sure to get multiple rates — you have 45 days to do so without taking multiple credit hits from the hard pulls. All mortgage inquiries are lumped together on your credit report if they’re made within that 45 day period, meaning that only one hard hit will count against you — no matter how many lenders you get rates from.
- Determine whether you’ll be saving enough that the refi makes sense. Closing costs have to be paid on refis just like on other mortgage loans, so you could end up paying more than you save if you aren’t careful.
- Choose a lender and apply. You will be asked to provide your employment history and salary, your current mortgage balance, and information on other debts or assets. It’s basically the same process as it was when you first bought your home, but in some cases it may be more streamlined. It will depend on the type of refi loan you opt for, though.
- Get ready to have your property appraised. Unless you’ve opted for a certain type of streamline refi, you’ll have to have your property appraised again. If your property value has dropped since you bought your home, you may find out that you have less equity than you once thought. That could throw a wrench into your refi plans, so try to make sure that isn’t the case before applying.
- Close on your refinance. Understand that you will have to pay closing costs and other fees that many lenders require.
[ Read: How to Improve Your Credit Before Refinancing ]
Benefits of a 20-year mortgage
As with any mortgage loan option, 20-year mortgage loans have advantages over other types of loans.
- Lower rates: Many 20-year mortgages have comparable or slightly lower rates than longer-term mortgages. Lower interest rates and the shorter loan term mean you’ll pay less in total interest over the life of your loan.
- Earlier payoff: If you refinance from a 30-year loan to a 20-year loan, you’ll also pay off your mortgage a lot earlier thanks to the shorter repayment time frame.
- Lower overall costs: If you go from a 30-year mortgage to a 20-year mortgage, you decrease the timeline of your loan, which reduces your costs overall.
Drawbacks of a 20-year mortgage
- Costs more than a 15-year loan: A 15-year mortgage will likely save you money than a 20-year mortgage would because you will pay a lot less in total interest due to the shorter loan term.
- Higher monthly payments: You’re paying off your loan quicker than you would with a 30-year loan, which means you’ll have higher monthly payments to contend with. This could be tough on your budget if you’re already struggling with your normal monthly payments, so make sure you can afford it before refinancing.
- Not as many options: There are lenders that offer this type of loan, but not all of them will. This could limit your lender options — especially if you want to stay with your current lender to refi but they don’t offer this type of loan.
[ More: How to Calculate Your Mortgage ]
Tips on refinancing to a 20-year mortgage
Refinancing to a 20-year mortgage will likely give you more favorable terms and a lower interest rate. You might also consider refinancing your mortgage to borrow against the equity in your home to consolidate high-interest debt or make improvements to your home.
Here are a few tips on refinancing to a 20-year mortgage.
- Take a look at why you want or need to get from refinancing your mortgage. You need to decide what you want from your refinance. Maybe you want to switch from an adjustable-rate loan to a fixed-rate loan, or to a shorter loan term to pay off your loan faster. These factors need to be considered before refinancing.
- Determine how much equity you have in your home. You will likely need to have at least 3% equity in your home for a refinance.
- Calculate your break-even point. The break-even point is the time in which it will take to recoup what you paid in closing costs. You’ll need to make sure that you’re actually saving money with your refi before you commit to it.
- Make sure you can afford the loan. This is very important with a 20-year refi, as you will have higher payments each month — even if your interest rate is lower with the refinance loan. You’re paying off your loan much quicker than you would otherwise, so make sure you can afford it over the long haul.
- Learn all about the closing process. From start to finish, it can take anywhere from 20 to 45 days to refinance your mortgage, or perhaps even longer if you run into any problems. You have three business days after your closing to change your mind about refinancing your loan.
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