Is a 20-year mortgage right for you?

From Yahoo Homes 4/25/14

Does a 30-year mortgage seem excruciatingly long? Well, it does for many homeowners, but luckily, it’s not your only option. Whether you’re looking to purchase or refinance your home, you could reap huge savings by going for the under-the-radar 20-year mortgage.

It’s not as popular as the 30-year mortgage, which offers the lowest monthly payment, says Jered Helton, vice president of the Oregon Mortgage Bankers Association. Nor is it as popular as the 15-year mortgage, which draws homeowners who want to aggressively pay down their debt.

But while it’s not as common, the 20-year mortgage does have its own advantages. So, how do you know whether a 20-year loan is the best option for you? Keep reading to find out the important factors to consider regarding this rare but potentially beneficial mortgage.

The Interest Rate
Although 20-year mortgages are considered a rare breed, industry experts say homeowners are attracted to them due to their interest rates, which typically are lower than those attached to 30-year loans.

How much lower? The interest rate on a 20-year fixed-rate mortgage is typically about .25 percent lower than its 30-year counterpart, says Helton.

That may not sound like it’d make much difference, but this example proves otherwise: A homeowner who takes out a 20-year fixed mortgage for $300,000 at a rate of 4 percent will save nearly $95,000 in interest over the life of the loan, compared to a 30-year fixed mortgage at a rate of 4.25 percent.

The Monthly Payments
If you’re looking to refinance, you might wonder, “Why not go for the 15-year mortgage since it has a lower interest rate?” It’s true, the drop in the interest rate going from a 30-year to a 15-year loan typically is around .75 to 1 percent, says Helton, which could offer huge savings when compared to a 20-year loan.

But “the advantage of a 20-year loan over a 15-year is that the payment is lower,” says Nelson Otero, president of the Southern Los Angeles chapter of the California Association of Mortgage Professionals.

To illustrate this point, Helton brings up this example: “On a $200,000 loan, the difference between a 20- and 15-year loan would be about $190 a month. For most people, that would impact their housing budget, and they might not be able to pay that extra $190.”

For people who might find it difficult making higher monthly payments with a 15-year refinance, opting for a 20-year loan is an affordable solution to paying off your mortgage faster than a 30-year loan, adds Otero.

Veronica Ondrejech, president of the Central Coast chapter of the California Association of Mortgage Professionals, agrees. She says homeowners could discover that refinancing to a 20-year mortgage can help them reach their financial goals in a full decade less than traditional 30-year home loans.

“If they can pay that extra $300 a month for a lower interest rate in the 3’s, that could sway them to refinance and pay off a loan in 20 years instead of 30,” Ondrejech says.

At the end of the day, of course, deciding between a 15-, 20-, or 30-year term will come down to what you can comfortably afford on a monthly basis.

“Make sure it fits your longtime goal,” Helton says. “Ask about a 20-year loan option, and if the payment is right for you with current and future expenses, then it’s the right term for you.”

The Right Candidate for a 20-Year Loan
So what kind of borrower typically refinances to a 20-year mortgage? According to Helton, you may be a good candidate for a 20-year loan if you can still keep your monthly payments close to the same amount as on your 30-year mortgage.

Thanks to interest rates falling to record-setting lows the past couple of years, Brenda Miller turned out to be one such candidate.  A 47-year-old marketing specialist, Miller shortened her 30-year mortgage to a 20-year fixed rate mortgage in 2012 to help achieve an important personal and financial goal: Owning her home by retirement age.

Miller purchased her condo in 2001 with a loan for $126,000, which included closing costs, near San Pedro, a port area of Los Angeles.

“Although it was not my preferred location, it was a wonderful gated complex with running streams, waterfalls, and lots of wildlife,” Miller says. “And it was in my budget.”

Miller was always smart about what she could and couldn’t afford, which is why it took her so long to consider a 20-year loan. She already refinanced twice before (in 2004 and 2008), both times to a new 30-year term. During her second refinance, she took out $50,000 for home improvements.

Then, in 2012, when mortgage rates hit historic lows, Miller discovered she could shorten her loan term to 20 years with an interest rate at 3.65 percent. With such a low interest rate, Miller knew she could refinance to a shorter-term and still stay within her budget.

“I am keenly aware of my budget and what I can afford,” Miller says proudly. “Since I purchased my condo, I have always paid between $900 and $950 a month, never more than that.”

Miller’s advice to other people considering a 20-year mortgage would be to make sure they know whether loan terms meet their specific financial needs.

“However, the most important thing someone can do is to create their own family budget, including everything that is important to them,” Miller says. “If cable television, weekly manicures, gym memberships, or dining out are important, make sure they’re included in the budget.”

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