mortgage

Basics of the 20-year, fixed-rate mortgage

Benefits of a 20-year, fixed-rate mortgage

Borrowers who are looking for an unchanging mortgage payment for a specific period are often drawn to a 20-year, fixed-rate mortgage, which allows them to time their loan payoff to meet other financial goals.

Definition of a 20-year, fixed-rate mortgage

The main feature of a fixed-rate mortgage loan is that the interest rate and the monthly payments for principal and interest are constant for the entire loan period. Borrowers of a fixed-rate loan are given a loan amortization schedule at settlement that states the exact amount of their principal and interest payments for the entire loan period.

The percentage of the payment that is allocated to interest and to reducing the principal balance will change over time, but the monthly payment for principal and interest will not. The housing payment may change for borrowers who pay their property taxes and homeowners insurance through an escrow account with their mortgage payment because these bills adjust over time.

Advantages of a 20-year mortgage

Fixed-rate mortgages are popular with homebuyers because they allow the borrowers to budget around a steady payment. They are available for various loan terms from 10 to 40 years, usually with a higher interest rate charged for the longest loan period. A 20-year, fixed-rate mortgage will generally have a lower interest rate than a 30- or 40-year mortgage.

Disadvantages of a 20-year mortgage

While the safety of a fixed interest rate can be comforting, the disadvantage of a 20-year, fixed rate loan is that the borrowers cannot take advantage of lower interest rates other than by refinancing into a new home loan.

While the interest rate on a 20-year loan is usually lower than a mortgage with a longer loan term, the payments are higher because of the shorter time frame in which to pay the loan in full.

20-year mortgage borrowers

Homeowners who have a goal of owning their home without a mortgage by a certain date or simply as fast as they can afford it may opt for a 15- or 20-year fixed-rate mortgage rather than a loan with a longer term. A 20-year, fixed-rate loan can also be a good option for homeowners who want to refinance but do not want to extend their mortgage payments for another 30 years.

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