As a prospective or current homeowner, one of the most important decisions you’ll make is choosing the right mortgage term. Borrowers often opt for a 15- or 30-year mortgage, but another option you might consider — or refinance to — is a 20-year mortgage.
With a 20-year mortgage rate, you’ll pay less in interest than you would with a 30-year term. Plus, your monthly payments will be lower than with a 15-year term. In other words, a 20-year mortgage could be the sweet spot between these two more popular options.
Keep in mind: In today’s rate environment, you might not (significantly) lower your mortgage rate by choosing or refinancing to a 20-year term. One alternative is sticking with the 30-year term but making extra monthly payments to pay off your mortgage early.
Current 20-year mortgage rates
Typically, longer-term mortgages have higher rates because of the increased risk to the lender. So, 20-year mortgage rates are usually lower than 30-year mortgage rates, but higher than 15-year mortgage rates.
In general, adjustable rate mortgages (ARMs) will also have lower rates than 20-year fixed-rate loans during the initial period, as lenders can later adjust the rate to mirror market conditions.
Will 20-year rates drop during 2024?
There has been a long downward trend in mortgage rates over the past four decades. However, things changed in 2022 when the Federal Reserve began increasing its target rate to combat runaway inflation. In fact, the Fed raised rates 11 times between March 2022 and July 2023 (and kept the heightened rate steady through March 2024). As a result, current mortgage rates have jumped to the highest levels since the early 2000s.
However, now that the inflation rate has slowed, many wonder whether the Fed will begin cutting rates again.
“While the Federal Reserve has made strides toward achieving its inflation targets, it has recently adopted a wait-and-see approach, carefully observing the effects of its previous interest rate hikes,” said Matt Dunbar, an executive at lender Churchill Mortgage. “Although inflation has begun moving in a favorable direction and employment figures remain robust, these trends are not guaranteed to persist.”
Dunbar explained that the Fed’s cautious stance suggested the potential for 20-year mortgage rates to decrease in late 2024, though any significant economic shifts could lead the Fed to either maintain its current rate levels or even implement slight increases to nudge inflation closer to its target. As a result, he said, prospective mortgage borrowers should stay tuned.
Understanding 20-year mortgage rates
Twenty-year mortgage rates are typically 0.25 to 0.50 percentage points lower than 30-year rates, said Darren Tooley, a loan officer at Cornerstone Financial Services. The shorter term also significantly reduces the interest you pay over the life of the loan.
“The combination of the discounted rate and shorter amortization will help you build equity in your home faster, and can save you between 40% to 60% in interest overall,” said Tooley.
That said, a shorter repayment term of 20 years means you’ll have a higher monthly payment.
“Unlike having a 30-year loan and choosing to pay a little extra to pay the loan off faster, with a 20-year loan, you are obligated to make that minimum payment every month,” added Tooley.
Here’s an example of how your repayment can vary monthly and overall for a $300,000 loan:
Pros and cons of 20-year mortgage rates
Pros and cons of 20-year mortgage rates
One of the biggest advantages of 20-year mortgage rates is the opportunity to save money. For one, the shorter loan term (compared to a traditional 30-year mortgage) allows you to pay off your loan faster and potentially save thousands of dollars in interest payments over the life of the loan.
Plus, interest rates for 20-year mortgages are typically lower than those for longer-term loans. The fixed interest rate also provides stability and predictability so you can budget more effectively.
However, one disadvantage is that the monthly payments on a 20-year mortgage are higher than those on a longer-term loan, which could strain your cash flow and budget. The higher monthly payments may also limit the amount of money you have available for other investments or savings goals.
Finally, you may need a stronger application — such as higher credit scores, a lower debt-to-income ratio or a bigger down payment (or more equity) — to qualify for a 20-year term compared to a 30-year loan.
Homebuyers: How to find the best 20-year mortgage rates
If you decide that a 20-year mortgage rate is best for you, here are some steps to secure the lowest APR possible.
- Check your credit. In general, the higher your credit scores, the lower the mortgage rates you’ll be offered. So before applying for a mortgage, work on improving your credit scores by paying bills on time, reducing outstanding debt and correcting any errors on your credit reports.
- Strengthen your potential application. Beyond credit, your income and debt play a key role in your mortgage rate. The higher and more stable your paycheck is, the better you’ll look in the eyes of lenders. While it’s not possible to increase your income overnight, you could swing your debt-to-income ratio in the right direction by paying down existing debt. Adding a cosigner or co-borrower to your mortgage application helps, too.
- Research lenders. Visit lender websites, use online comparison tools and consult with a mortgage broker who can provide access to some of the best mortgage lenders. Local banks and credit unions often offer competitive mortgage rates, so be sure to check with them in addition to national financial institutions.
- Get preapproved. Before starting your search for a home, you may want to get preapproved for a mortgage with a lender that stood out during your initial research (don’t worry, you can change lenders after getting an accepted offer on a house). This will give you a better idea of how much you can afford to borrow and make you a more attractive buyer to sellers.
- Compare offers. Once you’ve received a few offers for a 20-year mortgage, review the interest rates, points and fees associated with the loan. Sometimes, a slightly higher interest rate with lower fees can be more cost-effective in the long run. Comparing APRs, which account for the simple rate and certain fees, will give you a more complete view of each loan’s true cost.
- Negotiate. Don’t be afraid to push lenders for a lower mortgage rate or discounted fees. Having multiple offers from different lenders gives you leverage in negotiations. “Ask the major banks to compete against their competitors,” said California-based real estate executive Joe Salerno, “and you might be surprised with the results.”
- Lock in your rate. Once you find a competitive 20-year mortgage rate, consider locking it in to protect against potential rate increases while you complete the homebuying process. Be sure to understand the terms and duration of the rate lock agreement.
Homeowners: Should you refinance to a 20-year term?
On the one hand, refinancing from a 30-year term (minus your repayment progress) to a 20-year term might help you save money on total interest paid and gain equity faster. On the other hand, you’ll have to account for the cost of refinancing, and you could end up with higher monthly payments, which requires pressure-testing your budget.
In other words, homeowners “must weigh the higher upfront cost against the long-term benefits, considering their budget and financial goals to decide if the accelerated payoff schedule aligns with their overall financial strategy,” said Dunbar.
Related >> The best mortgage refinance lenders of 2024
Example: Say you originally borrowed $200,000 using a 30-year fixed-rate mortgage with a 7% interest rate. You’re four years into paying it off (with a balance of $190,949 remaining), and decide to refinance to a 20-year fixed-rate home loan with a 6% rate. There are $6,000 in closing costs, which you roll into the principal. Here’s how your monthly payments and total interest paid would compare:
As you can see, your payments would increase by $37 per month, but you’d save $85,617 in interest and pay off your loan six years sooner. A free online mortgage refinancing calculator can help you figure out your potential refinancing savings (or costs).
Related >> How soon can you refinance your mortgage?
Frequently asked questions (FAQs)
Factors that affect mortgage rates include the Fed’s monetary policy decisions, inflation, the bond market and the overall health of the economy, as well as personal factors, including your credit scores, down payment amount (or equity, in the case of refinancing), location and more.
It helps to have good credit, sufficient income, a stable job history, a low debt-to-income (DTI) ratio and a sizable down payment (or equity, in the case of refinancing).
If you can afford a higher monthly mortgage payment and want to build equity in your home faster, you may opt for a 20-year mortgage rate over a 30-year term. A 20-year rate might also be a good compromise between the extremes of 15-year and 30-year terms.
A 20-year mortgage usually has a slightly lower interest rate than a 30-year mortgage. A lower rate combined with a shorter repayment timeline means you can save a significant amount in interest charges.