Friday Q&A: 20- or 30-Year Mortgage?

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Q. My wife and I have decent equity in our house, which we’ve owned for about 10 years. We’d like to refinance and are interested in saving money on a long-term basis, even more than a lower monthly payment. Is refinancing still a good deal? – K. Wesslin, Austin, TX

A. You bet, especially since you seem to be a good candidate for a 20-year refinancing, and because rates are as low as 30-year mortgage loans were just last year.

Nobody talks about them much, but 20-year mortgage loans can save you a ton of money over the long-term, and more banks and lenders are carrying them.

Don’t be put off by the “unique” nature of a 20-year loan. Sure, it’s an odd number for a mortgage, but characteristics of the more traditional 15- and 30-year mortgages are the same.

For starters, the 20-year model is a fixed-rate mortgage, so all of your monthly payments will be identical for the life of the loan. Like a 30-year loan, the lender weights the total payments so the first few years usually go toward paying down the interest. But if you’re flush (and not all of us are), you can make an additional payment or two per year so it directly applies to the principle balance on your 20-year mortgage loan.

The immediate benefit you get with a 20-year mortgage loan is a significantly lower interest rate (when compared to a 30-year fixed-rate mortgage loan). You didn’t say what your current interest rate is on your mortgage loan, but for the sake of argument, let’s call it 6%. Now, let’s compare it, apples-to-apples, between a 30-year fixed-rate loan and a 20-year fixed-rate loan with a realistic rate of 4.5%. (This isn’t a perfect comparison and we do urge you to use BankingMyWay’s Mortgage Loan Calculator and BankingMyWay’s Refinance Interest Savings Calculator to run your own numbers).

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OLD MORTGAGE

Original Mortgage - $200,000

Interest Rate – 6.00%

Term – 30 years

Monthly Payment = $1,199.10

Total Payments = $431,677.03

Total Interest = $231, 677.03

NEW MORTGAGE

Original Mortgage - $200,000

Interest Rate – 4.50%

Term  - 20 Years

Monthly Payment - $1,265.30

Total Payments - $303,671.63

Total Interest - $103,671.63
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While you’ll likely pay more per month with a 20-year mortgage than on a 30-year loan, with interest rates so low right now, it won’t be much more. Otherwise, across the board, you’re likely to save a ton of money.

So, call it the “new deal.” Baby Boomers like to say that 60 is the new 50. In the new mortgage market, 20 might be the new 30.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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