The time required to pay off a loan has the biggest influence on the amount of your monthly payment. The lower the loan term, the more you will save in interest compared to longer term loans, but your monthly payments will also be larger. With so many loan term options to choose from, there are a lot of factors to look at when making a decision as to what loan term is best for you, your budget, and your financial situation. Read on to see if a 30- year or 20-year loan is the best choice for you!
The Difference in Interest Rates
At first glance, there isn’t much difference between the interest rate on a 30-year loan and a 20-year loan. Currently, the difference between the two types of loans is only around .13 percent, which may not seem like a lot, but this small percentage can mean thousands of dollars over the life of the loan.
These rates fluctuate based on several factors, but they usually follow the same pattern. The difference in interest on a longer term loan doesn’t look that significant, but the lenders will collect more revenue over time on a long term loan than they would on a short term loan.
However, the monthly mortgage payment will be larger on a 20-year fixed-rate mortgage loan than it would be on a 30-year fixed-rate loan. Whichever you choose to go with depends entirely on your budget and future plans, but you should keep in mind that you will always save money by choosing the shorter term loan. The 20-year fixed-rate mortgage is a good compromise for someone whose budget doesn’t allow him or her to make the monthly mortgage payment on a 15-year mortgage, but wants to pay off their loan in a shorter time than 30 years, while saving some money in interest.
Other Differences Between 20-Year and 30-Year Mortgages
The interest rate is not the only aspect that you should consider when choosing between a 20-year fixed-rate loan and a 30-year fixed-rate loan. Another important part of taking out a loan is how much you will be paying in points. Points are fees charged by lenders to cover costs like inspection fees and preparation fees. The points will usually be a percentage of your total loan amount and will be based on the mortgage term. With points charged on a 30-year mortgage being a little over 1 percent, you will again save money be choosing a shorter term mortgage, for which the points will be under 1 percent.
Another thing that you should take into consideration when choosing between the two types of loans is how fast equity is built with each loan. Shorter term loans, like the 20-year, allow you to build equity much faster than you would on a 30-year mortgage loan. Higher equity will make it possible for you to secure a second mortgage loan much easily.
At the end of the day, choosing between a 20-year and a 30-year mortgage loan will depend on whether you can afford the higher payments of a shorter term loan. Saving money is always a top priority for everyone, so you should choose the mortgage loan that is less expensive, but only after a careful analysis of your options and budget. The mortgage rates difference might not seem very significant when shopping for a loan, but it will make a big difference in how much money you pay over time.