Web Content Viewer

20-Year vs. 30-Year Mortgage: What to Consider

Is a mortgage with a 20-year repayment term or a 30-year repayment term right for you?

When you buy a home using a mortgage, you must decide how long your loan term will be.

A 30-year mortgage is the most popular option, but it leaves you in debt for a long time. A 20-year mortgage is an alternative that allows you to be debt-free a decade sooner and pay less in interest over time, even though your monthly payments might be higher.

There are pros and cons to 20-year vs. 30-year mortgages. This guide will help you decide which is best for you.

An Overview of 20-Year vs. 30-Year Mortgages

Both 20-year and 30-year mortgages are secured loans you can use to buy a home. Each type of loan could be a fixed-rate mortgage or adjustable-rate mortgage. The loan repayment time is the key difference between them. A 20-year mortgage will be paid off in 20 years, while a 30-year mortgage will be paid off in 30.

What Is a 20-Year Mortgage and How Does It Work?

A 20-year loan has a shorter repayment timeline, so you don't pay interest for as long. This means your total borrowing costs are typically lower than for a 30-year loan. The shorter timeline also means the lender takes on less risk, so the loan interest rate could be lower. However, each monthly payment is higher because you have a decade less to pay your full balance.

What Is a 30-Year Mortgage and How Does It Work?

A 30-year mortgage will have a higher interest rate than a 15-year or 20-year mortgage, since it's riskier for the lender due to a longer commitment. However, with three decades to pay back your balance, 30-year mortgage loans have more affordable monthly payments than 20-year loans even if you pay more over the life of the loan.

20- vs. 30-Year Mortgage Key Considerations

Your payoff timeline has a big impact on your mortgage loan. Here's how it affects your mortgage payments, amount of interest paid, and more.

Payoff Timeline

A 20-year loan is paid off a decade faster than a 30-year loan. This saves you money since you don't pay interest for as long. It also allows you to be debt-free and truly own your home much sooner.

A shorter payoff timeline also means higher monthly payments. Each payment must be bigger since you make 120 fewer payments than with a 30-year loan.

Amount of Interest

Interest costs can be significantly lower on a 20-year loan than on a 30-year loan. Since your lender takes less risk with a shorter loan, interest rates are usually cheaper on a 20-year loan, and you don't pay interest for as long.

If you take out a 30-year mortgage for $400,000 at 6.5%, your monthly payment would total $2,528.27, and your total interest costs would be $510,177.95.
If you took out a 20-year loan, even at the same rate, your monthly payment would be $2,982.29 while your total interest costs would be $315,750.21.

Building Equity

It takes time to build home equity. Equity is the value of the home that you own, not the bank.

If you choose a 20-year loan, more of each payment goes to paying down your balance from the start. This helps you build equity sooner. It takes longer to build equity on a 30-year loan because so much of your early payments just cover interest on your loan.

20- vs. 30-Year Home Loan Pros and Cons

If you are deciding whether a 20-year home loan or a 30-year home loan is right for you, the table below can help you weigh the pros and cons.

	20-Year Mortgage	30-Year Mortgage
Advantages	Quicker mortgage payout Less interest paid Faster equity building A lower starting rate most of the time	Lower monthly payments More lenient qualifications More financial flexibility More lenders to choose from
Disadvantages	Higher monthly payments Stricter qualifications Less financial flexibility Fewer lenders to choose from	More interest paid Higher interest rates Slower equity building

Is a 20-Year or a 30-Year Mortgage Right for You?

So how can you decide between a 20-year versus a 30-year mortgage? Here are the key factors to think about:

Can you afford a higher monthly payment with a 20-year mortgage? Since you're committing to larger monthly payments, you must make sure they fit in your budget. A home affordability calculator can help you determine what you can afford.
How long do you plan on living in this home? If you don't plan to stay in the home long enough to pay it off, committing to the higher monthly payments on a shorter-term loan may not make sense. In this case, the 30-year mortgage might be best.
How interested are you in building equity? You build equity faster with the shorter-term loan, so you could walk away with more money when you sell if you opt for a 20-year mortgage.
What is the interest rate difference between the two loan terms? If you can qualify for a lower rate on a 20-year mortgage, you may prefer to choose that option to lower your financing costs.

Final Thoughts: Comparing 20- and 30-Year Mortgages

Choosing between a 20-year and a 30-year mortgage requires careful consideration of your finances and goals. You'll also have to decide if you want a fixed rate or an adjustable rate as well as other factors.

A mortgage loan professional can help you decide which loan best meets your needs and can work with you to get prequalified. Reach out to Freedom Mortgage today to explore your options and your home-buying journey.