20-year vs. 30-year mortgage: Which is best for you?

20-year mortgage pros and cons

With any mortgage option, you’ll find some benefits and drawbacks. The main benefit of choosing a shorter term length is paying less interest over the loan period. However, there is a trade-off: a higher monthly payment.

Pros

• Shorter repayment period: You pay your mortgage off a decade earlier than you would with a 30-year mortgage.
• Faster-building equity: You build equity faster with a 20-year loan, which means you can leverage your home’s value sooner.
• Lower interest rate: Shorter the repayment terms typically come with lower interest rates. You could save tens of thousands of dollars on interest with a 20-year mortgage.

Cons

• Higher monthly payments: Your payments on a 20-year mortgage will be higher because you’re squeezing the same loan amount into a shorter repayment period.
• Less house affordability: Choosing a 20-year mortgage may limit the maximum property price you can afford. If you’re limited financially but are looking for a more expensive home, a 20-year mortgage might not be the right choice.
• Less financial flexibility: The more money that goes toward your mortgage payment, the less you have to put toward other purposes, like investing for retirement or saving for a child’s education. If you end up needing the money that’s tied to your home, you might need to take out a home equity loan or line of credit, which tends to have a higher interest rate than a mortgage.

30-year mortgage pros and cons

30-year mortgages are a typical choice for homebuyers; for those who can’t afford a higher monthly payment, these longer terms can make homeownership a reality. But there are some downsides.

Pros

• Lower monthly payments: Thirty-year mortgages spread the same principal amount over a longer period of time, leading to lower monthly payments. This can increase your monthly cash flow and allow you to save and invest more money.
• More common: Thirty-year mortgages are the easiest to find because it's such a popular mortgage term.
• More home affordability: Because the repayment is spread out over a longer term, it makes it easier to purchase a higher-priced home while staying within your budget.

Cons

• Longer repayment period: With a 30-year mortgage, you make loan payments for a longer time. A 10-year longer repayment term equates to 120 more monthly payments to the lender.
• Slower-building equity: Since less of each monthly payment is going toward the principal of the loan, you won’t build equity as fast on a 30-year mortgage. If you put down less than 20% on a down payment, it will take longer to get rid of private mortgage insurance.
• More interest: Thirty-year mortgages may offer lower monthly payments, but they usually have higher interest rates, and you end up paying a significant amount more in interest charges over the life of the loan.

Current mortgage rate trends

Near the beginning of the pandemic, the Federal Reserve lowered interest rates to near 0% and took other steps to support the economy. This caused mortgage rates to sink to historic lows. As a result, many homeowners secured low rates on new homes or refinanced their mortgages to take advantage. According to Freddie Mac, the average rate on a 30-year fixed-rate mortgage reached a low of 2.65% in early January 2021.

As the economy has rebounded, interest rates have begun inching up. At the time of publishing, the average 30-year rate is at the highest level (3.56%) since March 2020, the month the World Health Organization declared a pandemic. As the Fed begins to raise rates and remove other types of support for the economy, economists expect mortgage rates to increase.

15-year vs. 20-year mortgage

A 15-year mortgage has many of the same benefits over a 20-year mortgage that a 20-year mortgage has over a 30-year one. It should come with an even lower interest rate and help you build equity in your home faster.

On the other hand, the monthly payments on a 15-year mortgage will be higher than on a 20-year loan. Overall, 15-year mortgages (or 10-year mortgages) are only worth considering if you can afford the higher monthly payments.

Bottom line: Should you get a 20-year or 30-year mortgage?

Each type of mortgage is suited to a different type of borrower. If you want to minimize your monthly payments and have more cash on hand to invest elsewhere, a 30-year mortgage may be your best choice. This term length tends to work well if you don’t have the monthly cash flow for a higher payment. You may also be able to afford relatively more house. That said, with a longer term, you will have to pay more in interest.

A 20-year mortgage is a better choice if you can comfortably afford the higher monthly payment. You’ll pay less money in interest and gain equity in your home more quickly. Ultimately, it comes down to your monthly budget and financial goals as a homeowner.