Today’s Twenty Year Mortgage Rates
The continually changing mortgage market often creates a confusing spectrum of choices for borrowers. By acquiring a general understanding of the types of mortgage products available and the advantages found in each, the consumer gains the ability to choose the best option. The 20 year fixed mortgage is available from a wide variety of financial institutions, though it is not marketed anywhere near as aggressively as 30-year fixed-rate mortgages.. The 20-year loan option provides distinct advantages over other products.
As with other fixed term loans, the interest rates on this plan will remain constant for the life of the loan. Once a payment amount is established and the loan granted, the borrower is assured that each monthly payment is identical for 20 years. On longer term loans such as a 20 year and 30 year fixed, payments during the first few years go primarily toward paying the interest. Very little of the principle is actually paid until later in the term. In many cases, additional payments early in the loan period may be applied to the principle or the entire loan may be prepaid before the end of the loan period.
The normal rule when comparing mortgage plans is that a longer term loan will typically have a higher interest rate than a shorter term. For example, a 30 year fixed loan may be available at 4%, a 20 year at 3.75%, a 15 year at 3.50% and a 10 year at 3.25%. These rates continually fluctuate but they often follow this pattern. The reason for this is that with a longer term loan the lender has the ability to collect more revenue over time, but in guaranteeing the loan for a longer period of time the lender is taking a greater interest rate shift risk. If interest rates fall the homeowner can refinance into a lower cost loan. If inflation picks up and broader financial market rates rise, the lender is stuck with the same rate they got when the loan was originated.
A borrower may save thousands of dollars in the long run by choosing a shorter term loan. The disadvantage to the borrower, however, is that the monthly payments are higher and qualifying may be more difficult. A 20 year fixed mortgage may be a good compromise for borrowers who desire a lower monthly payment than a 15 year loan offers but want the flexibility of completing the payments in a shorter time than the 30 year plans. Equity buildup from a 20 year fixed mortgage rises faster than a 30 year loan.
Fixed vs Adjustable
When interest rates are relatively low most consumers opt for the certainty of fixed-rate mortgages (FRMs). When interest rates are relatively high people are more inclined to opt for adjustable-rate mortgages which have a lower introductory rate.
Other financing options for home or real property loans include adjustable rate loans. In this case, the borrower assumes the risk of a higher payment at some point depending on market conditions. Homebuyers who do not plan to stay in the home for a long period or plan to pay off a loan quickly may decide to take the risk of an adjustable rate mortgage. Most ARM loans are hybrid ARMs, which offer a fixed initial rate for the first 3 to 7 years then after the introductory period the rate regularly adjusts every 6-months to year based upon a reference rate like the London Interbank Offered Rate (LIBOR) or the 11th district Cost of Funds Index (COFI).
Most homeowners across the United States tend to either move or refinance their home about once every 5 to 7 years. Those who are likely to move in a short period of time may want to opt for the lower adjustable-rate, whereas those who are certain of their job stability and want to settle down for life may want to lock in low loan rates on their home. Buyers who need to have a secure certain payment schedule, however, will select a fixed mortgage plan.
Several important features to remember about a 20 year fixed mortgage:
- Payments are consistent for the entire 20 year term.
- Interest rates typically lie between a 15 yr. and 30 yr. loan.
- Payments to the principle increase more rapidly than a longer term loan.
When to Apply
Although rates fluctuate to some degree on a weekly basis, watching general trends and economic conditions allows consumers to make the right choice for financing. Selecting a fixed term loan over a variable interest rate mortgage may depend on forecasting how interest rates are expected to change. For example, during inflationary periods when interest rates jump quickly and may be unpredictable, variable rate loans could create a financial hardship for some borrowers. They may find that the lender increased the mortgage payment because the prime rate jumped. The mortgage payment may continue to rise at the discretion of the financial institution. However, variable loans may be attractive with low starting rates enabling first time homebuyers to get into a starter home. If the loan applicant realizes the risks and has plans to either refinance, move or pay off the loan before an increase they may be a valid choice.
In contrast, those borrowers holding a fixed rate are protected from an increase during economic inflation. When interest rates are at a current low trend and forecasted to increase, securing a fixed mortgage becomes an attractive option. The disadvantage is that it may be more difficult to qualify for a 20 year fixed loan than a longer term such as a 30 year fixed because of higher payments and more stringent requirements. This type of loan is a good fit for borrowers who desire low risk and can comfortably meet the qualifications.
The most ideal time to finance is obviously when the rates are lowest; however other factors such as new home purchases, refinancing due to change of job or other lifestyle upsets may make the decision immediate. Borrowers interested in refinancing hold the best possibilities of ideal timing for a new loan. If the homeowner already has accrued some equity in the property, a refinance could lower the monthly payment significantly if the interest rates have dropped since the initial sale. Although additional fees are involved in refinancing, the advantage of a shorter term loan such as a 20 year fixed over a variable or longer term may offset those costs.
Loan Costs and Fees
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Every mortgage includes some upfront closing costs for processing and to pay the expenses of writing the loan policy. When moneys are fluid, for example during an economic upturn where financial institutions have abundant resources, some loans may be advertised as free to the borrower. These loans may seem attractive to the borrower but often come at a higher interest rate than other mortgage plans. One way or another you still end up covering the bank’s costs profit margin. Typically a new loan will include a series of fees including points which are 1% of the loan amount and paid at the time of funding to secure a lower interest rate. Some lenders allow points to be amortized over the life of the loan.
The cost of obtaining a mortgage varies due to differences in financial institutions, unique regions such as states in the U.S., the amount of the loan and several other factors. The borrower’s credit history will often have a significant impact on the cost of the loan and the interest rate being offered. Larger loans such as jumbo loans often carry higher initial fees. A large down payment may reduce the mortgage cost in some cases. Refinancing costs may be slightly less than for an original loan if the same lender is used and agrees to a reduction in their fees, particularly if the borrower has maintained a good credit rating.
Fees to be considered when financing a 20 year fixed mortgage:
- Credit rating report fees: Loans are only granted after a thorough credit report has been issued and the cost of obtaining these reports is passed on to the borrower.
- Title search: Most areas require a full title search to be completed before the deed is issued even in a refinancing situation.
- Loan origination fee: These charges cover the costs of loan processing and administration.
- Prepaid interest: The borrower often needs to set aside extra cash to pay for the gap between the time the loan is granted and the first payment due date.
- Property Mortgage Insurance – PMI is an insurance policy which protects the lender in case of default. Home buyers who put less than 20% down on their home are typically required to pay PMI until the loan to value (LTV) falls below 80%.
Fees for financing a new mortgage will vary between lenders and often depend on the current economic conditions. An advantage of securing a 20 year fixed mortgage versus shorter term loans or variable plans is that the costs may be amortized over a longer period making this loan the most practical and affordable option.