In order to become a well-educated consumer before you begin the process of purchasing your first or next home, you should take the time to review and investigate the variety of mortgage loan options that are available for borrowers. The 20 year fixed-rate mortgage loan is probably the most popular type of loan offered by lenders today and this mortgage offers many advantages that other mortgage programs don’t.
There are home purchase loans and refinance loans available for 20 year terms and offered at highly competitive rates. The 20 year loan has replaced the 30 year traditional as the most popular borrowing option because it takes less time to repay and in the long run, it is far cheaper.
How a 20 Year Mortgage Works
When a borrower locks in an interest upon approval for a 20 year mortgage, they are guaranteed that this interest rate will not change at all over the 20 year amortization period. There is a common misconception that the payment amount will not change with a fixed-rate loan. While the interest rate won’t increase, the amount of home owner insurance and property taxes can change, sometimes drastically. Borrowers who use escrow account in conjunction with their mortgage loans may see changing payments throughout the lifetime of the loan as these amounts go up and down.
20 Year Rates in Comparison to Other Mortgage Loans
A good rule of thumb to keep in mind is that the shorter your amortization period, the lower your fixed interest rate. A 20 year loan will generally have a lower interest rate than a traditional 30 year loan, which is why they have become the most popular loan type. The reason for this trend is that the longer the lender has the loan as a liability, the more risk they face. Charging more interest on longer amortization loans is one way for lenders to make up the risk by generating more revenue. While borrowers can save money by opting for a 5, 10 or 15 year loan, the payments could become unaffordable at any time. They do offer lower rates, but in most cases they are not a viable borrowing solution for most home buyers.
Watch Interest Rates To Find the Right Time to Apply for a 20 Year Mortgage
Interest rates change daily. In order to find the best time to apply, you need to watch rates and figure out when they have reached what you believe will be the lowest. With a 20 year mortgage, you have the option of either a fixed-rate or variable-rate loan. If you are considering a variable-rate loan, it is important to watch trends in order to predict how interest rate trends will be over the life of your loan. There are no guarantees and interest rates can skyrocket quickly. If you are not certain that you can afford double your initial payment, then you should stay away from variable-rate loans.
You need to take your financial situation into account as well. If you have just started a new job with a significantly higher salary and intend to stay there long-term, then this could be a good time to apply for a mortgage. You should also watch your credit report and apply for a mortgage when you have reached a point that you are using less than one half of the credit available to you. So, once you reach the half way point of paying off your car(s) and credit cards, you will be a more well-qualified buyer in the eyes of any lender.
When is the Best Time to Buy With A 20 Year Loan?
The best time to buy is always when there is a buyer’s market and home prices are low. Interest rates are generally also low, in order to stimulate the sale of real estate. Finding a time when both of these statements are true is the best time to buy a home with a 20 year loan. If the economy is struggling, a fixed-rate 20 year mortgage is the best option for almost every buyer. As inflation rises, variable-rate loans may react in unpredictable ways, leading to high interest rates and many borrowers finding themselves unable to meet the rising payment amounts.
If you predict that you will buy your home and continue living there for several years, then a 20 year loan would probably be a good option for you. If you are refinancing, you might want to consider whether a 20 year loan is the best option. In some cases with current interest rates, if your goal is to refinance your current loan in order to save money each month, you won’t. If you are ten years into a 30 year loan, then you might think a 20 year loan would give you a lower payment if it offers a lower interest rate. Depending on the amortization used, this is not necessarily true. Many borrowers are finding that they can get a longer term loan and pay extra, equal to what they pay now, and pay the loan off in less time than they have remaining on their current loan. Now, if you have a 15 year loan and you are 5 years in to repayment, a 20 year refinance loan with a lower and more competitive mortgage rate will definitely save you a lot of money. Granted, you will be extending your repayment significantly, but the money saved in the long run will make a 20 year loan an excellent financial decision.
Common Costs and Fees Associated with a 20 Year Mortgage
Every loan comes packaged with costs and fees. From the time that you make your application, you will be responsible for paying for the application processing and your credit report if your application is approved. Most lenders will track their costs and incorporate this total into your closing costs. For some buyers, it is possible to have the seller cover a percentage of the closing costs and this is advantageous when the lender incorporates the fees.
Some lenders will offer fee-free loans, keep an eye out for advertised specials by lenders who agree not to assess underwriting and processing fees. This doesn’t cover all fees, for example points. Points are equal to one percent of the loan interest rate and borrowers have the option of paying several points at the time of closing in order to lower their interest rate.
Different lenders will offer different fees and costs. There are rules that vary from state to state that govern the types and amounts of fees that lenders can assess to borrowers. Some of the fees that can be expected by borrowers seeking a 20 year mortgage include:
- Title Search Fees
- Loan Origination Fee
- Application Fee
- Credit Report Fee
- Appraisal Fee
- Prepaid Interest
Keep in mind that not all of these fees must be paid upfront. Points, or prepaid interest, can often be amortized over the life of the loan and will not have to be paid in full at the time of the closing. Some lenders will actually amortize all of the associated loan processing fees, while others will do this with only specific fees and amounts. Always ask the lender their policy before accepting a loan offer.