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October 10th, 2012

UPDATED: Trendy 20-year mortgages

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House on Calc for tri refiMore 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)

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22 Responses to “UPDATED: Trendy 20-year mortgages”

  1. Jason Says: August 27th, 2012 at 7:20 pm

    True, mortgages payments are higher, but with discipline paying off one’s home sooner is pretty appealing. Something many home builders don’t tell buyers is that it’s not all about mortgage payments, but a combination of mortgage and tax rates, especially if escrow in part of the equation. Overall, it’s as good a deal on the surface as paying twice a month on one’s mortgage.

  2. Tim Manni Says: August 28th, 2012 at 1:38 pm

    Hey Jason,

    Thanks for commenting. Obviously, a borrower selects a mortgage product/term that best fits into their financial goals. All else said, I’m just glad there’s finally some variety in the market.

    -Tim

  3. ely major Says: October 4th, 2012 at 5:07 am

    Every since the 1930’s Mortgages were a racket.
    Mortgage are still a racket established by the
    banks.. Who owned the housing, the banks.
    FHA program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance. Some FHA programs were subsidized by the government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers. Over time, private mortgage insurance (PMI) companies came into play, and now FHA primarily serves people who cannot afford a conventional down payment or otherwise do not qualify for PMI. The program has since this time been modified to accommodate the heightened recession.

    THe most loan you could get in the 30,s was
    3 or five years and when you lost your job the
    bank took the the home, now the government
    will steal your home. Housing cost should not
    exceed one year of your annual income.

  4. Jon Says: October 4th, 2012 at 5:40 am

    My wife and I chose a 20 yr. re-finance two years ago. It will save us over $65,000.00 in
    interest versus a 30 yr. mortgage. We waited until our own bank had dropped the rate to one
    that was very appealing, and is the one listed
    above in your article.
    I was always told that if you did re-finance and you aren’t getting a lower rate at least a
    full point below your existing mortgage, then
    don’t waste your time or money. We did not pay
    any points and the closing costs were much low-
    er than the big name big I had been dealing with by over $2,000.00. We’re very satisfied.

  5. Michael Says: October 4th, 2012 at 6:51 am

    Any buyer should insist on a quote for the full monthly payment by line item.

    For me, the difference between a 20 yr and 15 yr mortgage was $5 a month.

    The savings between a 30 yr and 15 yr mortgage for us was >$100K.

  6. Susana Says: October 4th, 2012 at 7:07 am

    The main reason to opt for shorter terms when refinancing is that you negate much of your savings from lowering the interest rate if you keep resetting the clock to 30 years.

  7. MizPat Says: October 4th, 2012 at 7:43 am

    Trendy? My parents bought their home on a 20 yr fixed rate in 1953, when that was the only thing out there. How much better off would the housing market be if none of the “designer” mortgage products were available?

  8. Dave L Says: October 4th, 2012 at 7:55 am

    Go for it! Thanks to streamline refinance and a 15 year loan, I will have my house paid for just after my official retirement age. I am extremely grateful to have this opportunity.
    I once lost a home to foreclosure on a 30 year note with exceedinly high interest rate in the 80’s. After recovery, I chose a 15 year note and couldn’t be happier. I have kept a bunch of interest over a much shorter time period.

  9. julie Says: October 4th, 2012 at 8:03 am

    we just refinanced with a 30 (rates were the same for all 3) the only reason why is because we have a child in college and sometimes might need to cut back on our over payment to just what the ticket says.

  10. Kevin Ingle Says: October 4th, 2012 at 8:18 am

    I am in the process of refinancing (again). Rates are 3.375 fixed for 30 years no points no fees.

    The rate spreads on the 20/30 year mortgages are negligible. Given the slight if any rate difference, I would opt for the 30 and make extra payments. No sense committing to a higher monthly payment for no compensation on the rate.

    So, I do accelerate payments on the 30 – to make it a 20 — but….. I have the flexibility of lower payments if needed in the future.

    The rates on the 15s are about 1/2% below the 30s…. However, given my personal situation, the lower payments of the 30 year product is preferred.

    Looking back at these historically low interest rates, we’re all going to wonder 20 years from now why we did not take out 30s and invest the difference in a decent well managed conservative stock mutual fund.

  11. Brent Says: October 4th, 2012 at 8:28 am

    Listen people…..get the lowest interest rate possible on a 30 year mortgage to get your payments low. If you want, add extra to your payments if you want a shorter payoff or pay less interest overall. If times get tough (as we have seen can happen) you can cut back the extra payments you have been making and you can still afford the original 30 year payments. The 15 – 20 year mortgage will force you to make the higher payments the entire term and make life challenging when money gets tight…..

  12. FuzzyDub Says: October 4th, 2012 at 8:56 am

    I was thinking to refinance & lower my interest rate. Worked through the math with a couple of different mortgage calculators, and then I realized something. Right now, using other peoples money is CHEAP!

    Consider this, using the numbers in the story, that 20-year payment will cost you an additional $305 per month in cash outflow. The 15-year payment will result in a total of $578 per month in cash outflow.

    That is cash that could be utilized to invest in a business, in stocks or other potential money makers.

    We refinanced for 30 years. Cut our monthly payments by over $300. Used some savings to purchase a rental property & the mortgage payment on the rental? $250. (also a 30 year mtge). Now I’ve got a cash inflow of $800 from the rental unit and the combined mortgage payments for both properties are slightly LESS than what my previous mortgage was on just our residence!

    Now, there are some expensed related to the rental property & I am capable of doing most minor repairs & maintenance and managing the property myself instead of hiring a 3rd party. So I don’t recommend this as something everybody should do.

    My point is, why the heck not use other people’s money if you can generate a positive cash flow and a return on investment in the double digits!?!

  13. FuzzyDub Says: October 4th, 2012 at 8:58 am

    I wish I could finance for 50 years at today’s rates!

  14. wendy Says: October 4th, 2012 at 8:59 am

    I have refinanced several times and have never seen a lower interest rate offered for a 20 year mortgage compared to a 30 year. I have always been told the rate is the same. You get a lower rate if you go to a 15 year term. There is no benefit to a 20 year mortgage. You can pay extra on a 30 year mortgage and get the same results.

  15. Boris Says: October 4th, 2012 at 9:20 am

    My 1st mortgage in 2002 was a 25 yr. The Credit Union said they’d give me a mortgage for any number of years I chose, up to 30. 20 has always been an option with most institutions. Remember, the first 5 years of payments of a 30 year mortgage are 97% interest, and only 3% principal. I sold that house a few years later and bought my 2nd home on a 15 yr which I was fortunate enough to pay off in 7. Good luck to ya’ll.

  16. Owen Says: October 4th, 2012 at 9:24 am

    When my wife and I refinanced our home earlier this year we went down to a 20 year. It worked for us because the increase of our monthly payment was a mere $80 more. I was skeptical of a 20 year because of the increase in monthly payment but I am pleased that we asked. Had we been scared off buy the assumption our monthly payment would increase by hundreds, we would have missed the chance to save thousands in the long run. My point is each person’s rates, scores and income are different and combine for a different outcome, so do not be afraid to ask.

  17. Marci Says: October 4th, 2012 at 9:43 am

    What are the benefits of refinancing to a lower term versus just making extra payments toward the principle each month?

    Thanks!

  18. Mike Says: October 4th, 2012 at 9:53 am

    For most of us who are forced back into FHA, the only way to avoid monthly PMI is to go 20% down at 15 years. The 30 yr with PMI was almost the same payment.

    It is an unfortunate situation for those who cannot afford the higher payment and/or down payment.

  19. Mark Maloney Says: October 4th, 2012 at 10:06 am

    There are several factors that I believe must be considered when refinancing to a shorter loan: 1. start by knowing the actual interest (and possibly PMI) expense to keep your existing loan; 2. compare that to the actual interest (and possibly PMI) expense of the proposed refi (with higher monthly payt; 3. consider the actual interest (and possibly PMI) expense of the simply adding the increased monthly payt to your existing loan; 4. consider the tax advantage of keeping your original loan, and uping your 401k contribution instead of applying that additional amount to existing/new mortgage
    5. consider the end goal – in my case, to be mortgage-free before I retire

  20. Marketing and Housing Market News | San Antonio & Dallas Fort Worth Real Estate Says: October 9th, 2012 at 5:36 pm

    [...] You can check out the entire article here [...]

  21. Government indicts more than 500 on mortgage fraud | iTradeTerminal Blog Says: October 12th, 2012 at 3:38 am

    [...] « UPDATED: Trendy 20-year mortgages [...]

  22. Securitization Audit News UPDATED: Trendy 20-year mortgages | HSH Financial News Blog | Securitization Audit News Says: October 19th, 2012 at 12:47 am

    [...] is the original post: UPDATED: Trendy 20-year mortgages | HSH Financial News Blog This entry was tagged government, heightened, housing, housing-market, indicts-more, [...]

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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