UPDATED: Trendy 20-year mortgages
by Michele Lerner
More and more homeowners are taking a two-pronged approach to their refinance: lowering their interest rate and opting for a shorter-term loan.
While your monthly payments are likely to rise if you refinance from a 30-year loan to a 20-year loan, historically-low mortgage rates have made shorter-term home loans much more affordable.
20-year mortgages gaining popularity
According to the Mortgage Bankers Association (MBA), 30-year fixed-rate mortgages are still the most popular loan term for both purchase and refinance customers, but 20-year mortgages are becoming increasingly popular, especially among refinancers.
“Twenty-year fixed-rate loans are the third most popular mortgage product, behind 30 and 15-year fixed-rate loans, followed by 10 and 25-year mortgages,” says Matthew Robinson, senior public affairs specialist with the MBA.
While the MBA does not specifically track applications for 20-year loans, they do have an application category which they track called “fixed-rate loans/other terms” that includes 20-year mortgages. Robinson says the bulk of those “other-term” loans are 20-year mortgages.
The popularity of these loans, especially among refinancers, has grown enormously in the last year alone. The MBA says that other-term loans represented more than 15 percent of all refinance applications in August 2012 (latest data available), an increase of 23.25 percent compared to last year. Other-term loans represented just 1.91 percent of purchase applications in August 2012, but still an increase of 13.45 percent compared to August 2011.
So far this year, Patricia Widerman, a senior vice president at BB&T and group mortgage manager for Washington, D.C., and several other regions, says 20-year mortgages represent about 10 percent of the bank’s conforming fixed-rate loan volume.
20-year mortgage rates
Interest rates for 20-year mortgages are lower than interest rates for 30-year loans but higher than rates for 15-year mortgages.
For example, here are the mortgage rates offered by U.S. Bank on Oct. 10, 2012:
- 30-year fixed-rate loans: 3.875 percent
- 20-year fixed-rate loans: 3.750 percent
- 15-year fixed-rate loans: 3.125 percent (remember, mortgage rates fluctuate daily and can vary depending on factors like your credit score)
“Borrowers are choosing 20-year home loans over a 15-year loan because the monthly payments are lower even with a slightly higher interest rate simply because the loan is amortized over a longer period of time,” says Widerman. “Borrowers who are not completely comfortable with the payments on a 15-year loan can opt for a 20-year mortgage.”
Here are the monthly payments on a $250,000 mortgage for the three most-popular mortgage terms:
- 30-year mortgage (3.875 percent): $1176
- 20-year mortgage (3.750 percent): $1482
- 15-year mortgage (3.125 percent): $1742
Qualifying for a 20-year mortgage
Widerman says qualification standards for a 20-year mortgage are the same as for a 30-year or 15-year fixed-rate loan. The only difference is that your income must be sufficient to cover the higher payment.
“The only downside to a 20-year mortgage would be that the monthly payments are higher than a 30-year mortgage,” says Widerman. “For borrowers who are nervous about locking themselves into higher payments, a 30-year mortgage may be a better option. They can always make extra payments towards the principal to achieve the same goal of paying off the balance faster without the pressure of being committed to higher payments every month.”
A mortgage amortization calculator can help you compare your various mortgage options and decide which loan term is best for you.
(This post was originally published on Aug. 17)
