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If you get a 20-year mortgage, you have the potential to save more money in interest — compared to a longer-term loan — and still keep monthly payments manageable.
A 20-year fixed-rate mortgage is a home loan with a 20-year repayment term. Because the interest rate is fixed and the loan is fully amortizing, your payments stay the same for all 20 years. Twenty-year mortgages are less common than 15- and 30-year mortgages.
Learn More: What Is a Mortgage Rate and How Do They Work?
Here are some of the advantages of a 20-year fixed-rate mortgage that you should consider:
Lower interest rate:
In general, 20-year mortgage rates tend to be lower than what you’d see with a 30-year mortgage. As a result, you have the potential to save money in the long run by paying less in interest.
On top of a potentially lower interest rate, a 20-year mortgage also allows you to build equity faster. With more of your monthly payment going toward your principal, you can build equity in your home faster. This will allow you the chance to tap into it later, or get a larger chunk of capital when you sell.
With a 15-year fixed-rate mortgage, the monthly payment might be higher than you’d like. A 20-year mortgage offers a smaller monthly payment than a 10- or 15-year mortgage.
What Is a Mortgage Rate and How Do They Work?
Here are the downsides you need to weigh before you take on a 20-year mortgage:
Slightly higher monthly payments:
Monthly payments, even with a lower 20-year mortgage rate, will likely be higher than those of a 30-year mortgage. If you’re concerned about monthly cash flow, getting a 20-year home loan might not be the best option for you.
Somewhat limited purchase price:
In some cases, you might get approved for a lower loan amount as compared to a 30-year mortgage. This is due to the fact that the slightly higher monthly payments can impact your debt-to-income ratio and lead to a lower purchase price. If you want to be approved for a more expensive home, you might need to consider a 30-year mortgage.
When looking for a lender, be sure to consider 20-year mortgage rates too. You might have a harder time finding lenders willing to offer 20-year loans, but you can use Credible to see what terms are available.
Keep in mind that the best rates are reserved for those who have excellent credit and can put a significant amount of money down. To qualify for the best 20-year fixed mortgage rates, work on improving your credit score, as well as reducing your debt.
Carefully consider your situation and compare multiple lenders to ensure that you’re getting the best possible rate. Credible makes this easy. You can see personalized prequalified rates from several of our partner lenders in just three minutes — all without leaving our platform.
Getting pre-approved for a mortgage
Getting preapproved for a mortgage is a great first step in the homebuying process. Here’s what you need to know about qualifying for a pre-approval and the benefits of getting one.
How to buy a house
There are a lot more steps in the homebuying process than you might think. Review our checklist of steps to buying a house so you don’t forget anything along the way.
First time home buyer tips
From not saving enough for a down payment to skipping pre-approval, don’t fall victim to these first-time homebuyer mistakes. Here’s how you can avoid them.
How to qualify for the best mortgage rate
You really have to do your research if you want to get the best mortgage rate. Here’s how to find the best rate for your situation.
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As a Credible authority on mortgages, Chris Jennings covers topics including home loans and mortgage refinancing. His work has appeared in Fox Business and GOBankingRates.
Freddie Mac doesn’t track 20-year mortgage rates specifically. In general, though, the average rate for 20-year loans is slightly lower than rates for 30-year loans and slightly higher than 15-year loans. Rates on all three loan terms fluctuate in lockstep.
Mortgage rates for 30-year fixed loans have hovered around 3% since the start of the COVID-19 pandemic, and 15-year fixed loans have averaged about 2.6% in the same time, according to data from Freddie Mac’s Primary Mortgage Market Survey. The average rate for a 20-year loan would fall somewhere in between.
In 2011, the average rates for 15-year and 30-year mortgages were 3.68% and 4.45%, respectively. Even those rates are relatively low, especially compared to the peaks set in the early 1980s, when mortgage rates reached into the high teens.
Market conditions contribute to interest-rate fluctuations, but monetary policies implemented by the Federal Reserve are the primary driver. Although the Fed doesn’t set mortgage rates, it does set a federal funds rate, which is the rate banks use to make short-term loans to each other.
The federal funds rate, in turn, influences the rates banks charge to loan you money. When the federal funds rate goes up, mortgage rates tend to go up as well.
In times of economic crisis, the Fed may reduce the federal funds rate. For example, in response to the Great Recession, the Fed reduced the federal funds rate from 5.25% in September 2007 to between 0% and 0.25% in December 2008. The federal funds rate currently sits in that same range as the U.S. economy recovers from the effects of the COVID-19 pandemic.
Here are the average annual rates for 20-year fixed-rate loans over the last five years, according to data from Freddie Mac:
|Year||Average Annual Rate|
A good mortgage rate is one that’s substantially lower than the rates competing lenders are charging for. It’s important to compare at least three different lenders when shopping for a home loan. This will help you get a good rate on a 20-year mortgage, and it could end up saving you thousands of dollars in interest.
A lender’s mortgage rates aren’t set in stone. They vary depending on how risky a borrower you are, and that’s something you can control by:
Maximizing your credit score: Order a copy of your credit report. Correct any errors, and if you have unpaid collections, pay them off.
Paying down debt: Try to eliminate all of your current debt, such as car loans or credit cards, and keep average daily credit card balances low. You should also make sure you’re paying all of your bills on time.
Making a large down payment: The more you put down, the less risk you present to the lender. In turn, they’ll likely present you with a favorable mortgage rate. Plan to make a 20% down payment on your home to avoid private mortgage insurance.
Mortgage fees are usually paid at closing. The names of the fees might vary somewhat by lender, but here’s a list of common fees to be aware of:
Origination fee: Lender fee for organizing and putting together your loan. This is generally 0.5% to 1.5% of the total loan amount.
Application fee: Lender fee for reviewing and processing your loan application.
Appraisal: The fee you pay to cover the home appraisal.
Mortgage points: This is an optional charge. You can pay points upfront in exchange for a lower interest rate.
Mortgage insurance: Insurance premium required if you put down less than 20%. This premium is factored into your mortgage payment until you reach 20% home equity, in which case you can ask your lender to remove it.
Prepaid/escrow expenses: This includes any interest that accrues before your first payment period, your first year’s homeowners insurance premium, and escrow deposits to cover future homeowners insurance and property tax payments.
Generally, the longer the term, the higher the interest rate. That’s because loans with shorter terms present less of a risk to lenders.
Here’s how the terms of a 20-year fixed-rate mortgage might compare to the terms of other mortgage loans:
|Loan term||Loan amount||Fixed rate||Payment amount||Total interest paid over life of loan||Total paid over life of loan|
As you can see, the shorter the loan term, the lower the rate and the less you’ll pay in interest over the life of the loan. The catch is that you’ll also have a higher payment.
Determining which loan term to pick comes down to your personal circumstances — figure out what you can afford to pay on a monthly basis, and find a loan that offers the best compromise between affordability and long-term savings. Credible can help you compare loan options from multiple lenders.
A 20-year mortgage can be a good compromise between a 15-year term and a 30-year term.
A 20-year fixed mortgage is a good choice if you:
Plan to own your home for many years
Can afford a slightly larger payment than you’d have with a 30-year loan but not as large as you’d have with a 15-year loan
Want consistent monthly payments and a predictable payoff date
A 20-year fixed mortgage probably isn’t a good idea if you:
Are on a tight budget and need to keep mortgage payments as low as possible
Plan to move within a few years and can get a better rate on an adjustable-rate mortgage
Can afford the higher monthly payments on a 10- or 15-year loan while still meeting your other financial obligations and goals
Choosing the best refinance option depends on your situation and the reason you’re refinancing. In general, you’ll only want to consider refinancing when you can get a mortgage rate at least one percentage point lower than your current rate.
A 20-year mortgagecould be the perfect compromise between a 15-year and 30-year mortgage. You’ll still save on interest compared to a 30-year loan, but without as high of a payment as you’d have with a 15-year loan.
You may also consider refinancing into a 30-year loan and making extra payments. This effectively lowers the amount of interest you’ll pay over the life of the loan while also offering the flexibility of a lower monthly payment if needed.
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