The 20 year fixed rate mortgage is a good way to have fixed payments and shorten the term of your loan. You will build equity faster, pay less interest, and own your home sooner. Your monthly payments will be higher since the term is shorter.
Instead of the typical 30 year mortgage, a way to build equity in your home faster is to get a 20 year fixed rate mortgage. With this loan product, you pay off the loan in 20 years and therefore usually get a lower interest rate.
A fixed rate mortgage is a fully amortizing loan. That means that the principal and interest combine so that the full amount of the loan is paid off after a set amount of years. With a 20 year fixed rate mortgage, the loan is fully amortized, or paid off, after 20 years as long as no changes have been made to the terms of the loan.
A drawback to a 20 year fixed rate mortgage is higher monthly payments. Since you are paying off the loan faster than a 30 year mortgage, the monthly payments are higher. However, a 20 year fixed rate mortgage may be a good compromise for someone wanting to build equity quickly, but not wanting the steep payments of a 15 year fixed rate mortgage.
A 20 year fixed rate mortgage offers a lower interest rate than a 30 year fixed. With the lower interest rate and with more of the monthly payment going toward the principal, you will pay less in interest over the life of the loan. For example, if you are purchasing a house for $200,000 and you put down 20 percent, you would borrow $160,000. Your monthly payment for a 30 year fixed rate mortgage with a 7 percent interest rate is $1,064.48. However, over the life of the loan, you will pay $223,217 in interest. That is more than the original cost of the house! With a 20 year fixed rate mortgage at a 6.5 percent interest rate, you only pay $126,299 in total interest. The monthly payments are $1,192.92, not that much more that a monthly payment for a 30 year fixed. You pay 43% less interest but only raise your monthly payment 12% with a 20 year fixed rate mortgage.
If you want to pay as little in interest as possible but also keep your payments as low as you can, a 20 year fixed rate mortgage may be a good fit for you.