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A 20-year mortgage refinance lets you replace your current mortgage with a new loan of 20 years. For some homeowners, 20-year refinances are attractive because they generally offer lower rates than 30-year loans and a more manageable monthly payment than a 15-year loan.
A 20-year refinance might work well if you have sufficient income or cash reserves and want to pay off your house sooner. Refinancing into a 20-year loan may also help you improve cash flow and reduce how much you pay overall in interest.
Here are some of the advantages of a 20-year mortgage refinance that you should consider:
Somewhat lower interest rate:
In general, 20-year fixed mortgage refinance rates are lower than what you’d find with a 30-year fixed refinance, allowing you to potentially save more money over time.
Earlier payoff date:
A 20-year mortgage refinance can help you pay off your loan faster than a 30-year mortgage refinance.
Relatively manageable monthly payments:
If you want a shorter loan term, but aren’t sure about the payments that come with a 15-year fixed refinance rate, a 20-year refinance might make sense, since the monthly payments are usually lower.
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 refinance:
Slightly higher monthly payments:
When you refinance into a 20-year mortgage, you might end up with higher monthly payments than what you’d see with a 30-year refinance. This can be an issue if you’re worried about monthly cash flow.
With 20-year refinance rates, there’s usually more time for interest to accrue vs. a 15-year refinance. You could end up paying more overall if you choose a 20-year refinance instead of a 15-year loan.
Most lenders charge closing costs for a refinance. Make sure to compare your savings with 20-year refinance rates with what you pay in closing costs to make sure it’s worth it.
How to Refinance Your Mortgage in 6 Easy Steps
To get the best 20-year refinance rates, first try to improve your credit score. Improving your credit score can help you land a good rate, since the best rates are more likely to be offered to those with excellent credit.
Don’t forget to compare multiple lenders, too. You can use Credible to compare prequalified rates from all of our partner lenders. It only takes a few minutes.
With mortgage rates at historic lows, now is an opportune time to refinance to a 20-year mortgage. However, for those approaching retirement age, it might make more sense to refinance to a 10-year mortgage in order to retire debt-free. Carefully consider your situation and goals before deciding on a specific loan.
How a cash-out mortgage refinance works
Cash-out refinancing allows you to take money out of your home equity by refinancing your current mortgage for an amount that is greater than your existing loan and the refinancing loan’s closing costs. Find out more about how a cash-out refinance works.
How to refinance your mortgage
Refinancing your mortgage can be much simpler than the process you went through when you bought your home. Here’s how to refinance your mortgage — and everything you need to know before you do.
When to refinance your mortgage
If you own a home, it’s a good idea to reassess your mortgage periodically to see if you can find a better deal elsewhere. Check out some of the reasons refinancing your mortgage could be a good idea.
How to get the best mortgage refinance rates
You really have to do your research if you want to get the best mortgage refinance rate. We’ll take some of the burden off you by doing most of the legwork so you can find the best rate for your situation.
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 refinance rates specifically. In general, though, 20-year refinance rates are slightly lower than refinance rates for 30-year loans.
The average rate for a 30-year loan has hovered around 3% since the beginning of the COVID-19 pandemic, and 20-year refinance rates have naturally remained just below that threshold.
While 20-year refinance rates are currently in an uptrend, they still remain below their pre-pandemic average.
If you have an excellent credit score (740 or above), a good 20-year refinance rate may be slightly below 3%. For fair to good credit (600s to low 700s), your rate might be higher than 3%. However, mortgage rates remain near record lows, so while you might not receive the best rate with a lower credit score, a 20-year refinance rate at around 3% is still a relatively good rate.
Because rates fluctuate on a daily basis, you’ll want to compare today’s 20-year refinance rates with ones from the recent past to see if you’re receiving a good rate. It’s also important to compare multiple lenders as your personalized rates can vary.
You can quickly compare personalized rates, monthly payments, and fees with Credible in just a few minutes. Checking your refinance rates and terms with us is free and won’t affect your credit score.
Several market conditions affect 20-year refinance rates. The 10-year Treasury bond yield is one of the most significant variables as rising yields tend to indicate higher refinance rates.
The overall health of the economy also impacts rates. For example, rates can be lower during weak economic conditions, such as during the early days of the COVID-19 pandemic.
Unfortunately, rising inflation can cause rates to increase too. As short-term inflation rates are at multi-year highs, experts expect mortgage rates to rise accordingly. In response, you may decide to refinance sooner instead of later if the benefits are worth the cost.
While you cannot control the day-to-day mortgage rate changes, there are several factors you can improve to receive a better rate:
Credit score: You’ll usually qualify for the lowest rates with a credit score of 740 or higher. Making on-time payments, paying off debt, and correcting credit report errors are three ways to improve your credit score.
Debt-to-income (DTI) ratio: An ideal DTI ratio is 36% or less. If you can’t reduce your DTI to this level, conventional lenders may still accept your application with a maximum 50% ratio.
Cash reserves: Having several months of cash reserves in your savings and brokerage accounts can make it easier to qualify for financing. The recommended amount depends on your personal circumstances and what type of property you’re buying.
Loan-to-value (LTV) ratio: A lower loan-to-value ratio can make it easier to qualify for financing and help reduce your monthly payment. Most lenders want you to have an LTV of 80% before you can refinance.
Repayment term: Shorter repayment periods have lower interest rates but higher monthly payments. Your lender can offer rates for the different repayment terms you qualify for after reviewing your finances.
Lender fees: Your mortgage refinance closing costs are typically between 2% and 5% of the loan amount. You might be able to roll some of these fees into the loan or your lender may offer credits for a “no closing cost” mortgage. However, deferring the upfront payment can increase your APR.
If you want the lowest rates possible, a 10-year fixed-rate refinance is your best option. However, this mortgage refinancing loan type has the highest monthly payment.
When you need more affordable payments, a 20-year term is more budget-friendly despite the higher interest rate.
Whether you choose a 10-year or a 20-year term, your total interest savings are still significantly more than a 30-year mortgage refinance.
Here’s an estimate of what your new monthly payment and total interest savings might look like on a $200,000 loan for a 10-, 20-, and 30-year term.
|Loan term||10 Years||20 Years||30 Years|
|Total interest cost||$25,539.03 |
This table shows how 20-year refinance rates compare to shorter and longer terms with a $200,000 loan balance ($600,000 for jumbo mortgages).
|Mortgage term||Interest rate||Monthly Payment|
In addition to trying to get the lowest interest rate possible, make sure you can afford the monthly payment for accelerated repayment periods.
You’ll also want to save room in your budget for other expenses that might result in borrowing money at higher interest rates, such as purchasing a new vehicle or paying down high-interest credit card debt. Mortgage refinance rates are lower than most consumer loans and choosing a longer repayment period to get a smaller monthly payment frees up more cash for other priorities.
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