Nearly 78% of all home mortgages created last year were for a 30-year term, according to the Urban Institute. But have you ever considered a 20-year term? A shorter term will save tons in interest payments, and you will build equity faster and be mortgage free sooner, even though you will pay a bit more monthly. New proposed legislation could help first-time homebuyers reduce the cost of a 20-year mortgage or provide down payment help.
Here’s what you need to know if you’re considering a 20-year mortgage:
The loan term
In a 20-year fixed rate loan, the monthly principal and interest payment will always be the same. The term of the loan, or how many years you have to repay, affects:
- How much interest you’ll pay
- How quickly you’ll pay down your principal
- How soon you’ll own your home free and clear
Monthly mortgage payment
If you can afford to pay a little more each month, a 20-year loan is a great option. However, if you want the lowest monthly payment, you should choose a 30-year fixed-rate mortgage.
There are also adjustable rate mortgages, such as a 5/1 ARM. These mortgages usually have a favorable interest rate fixed for the first five years, then the rate is adjustable. Since interest rates are low right now, chances are the rates will be higher in five years, and the mortgage payment would go up. Unless you plan to sell the home in the first 5 years, this likely is not a good time to do an adjustable rate mortgage.
Here is a sample chart showing the difference in interest rate between a 15-, 20-, and 30-year mortgage, and the difference in payment amount for every $100,000 borrowed.
| Loan Type | 15-Year | 20-Year | 30-Year |
| Interest rate | 2.75% | 3.00% | 3.25% |
| Monthly payment | $679 | $555 | $435 |
| Total interest | $22,152 | $33,103 | $56,674 |
A 30-year loan costs $119 less per month than a 20-year mortgage, and $244 less than a 15-year loan. But look how much you would save in interest- up to $34,522! For a larger loan, that number could be very significant.
Proposed 20-Year, Low-Interest Mortgages
If approved, a new bill in Congress could help Americans struggling to become homeowners. The Low-Income First-Time Homebuyers (LIFT) Act of 2021 would be an advantage for first-time lower income buyers because it offers a 20-year mortgage with low interest rates. The Department of the Treasury would subsidize mortgage interest rates so borrowers’ monthly payments would be similar to a new 30-year FHA loan.
A shorter loan term would allow homeowners to build equity almost twice as fast than if they had longer loans. Building equity would give homeowners the option to borrow against that equity in an emergency, to complete repairs, pay for college or other needs.
Legislation is also being proposed to give first time home buyers between $15,000 – $25,000 in down payment assistance. Though neither program is finalized, there seems to be keen interest among lawmakers to include low-income home ownership as a priority in social spending packages. Such moves also help close the home ownership gap among minority buyers.