When most borrowers make plans for a purchase or refinance loan, they generally think of the 30-year or 15-year options.
They usually don’t consider the 20-year mortgage, which many loan originators also hesitate to recommend.
However, while it may not be as popular as the 30-year or 15-year mortgage, the 20-year option has a few definite advantages of which borrowers should be aware.
Interest Rate – Homeowners will appreciate the 20-year mortgage because it has lower interest rates than the 30-year loan. For example, the interest rate on a 20-year fixed-rate mortgage is usually about .25 percent lower than the 30-year mortgage. A homeowner who takes out a 20-year fixed mortgage for $300,000 at a rate of 4 percent will save almost $95,000 in interest over the life of the loan, compared to a 30-year fixed mortgage at a rate of 4.25 percent.
Low Monthly Payments = Compared to the 15-year mortgage, the 20-year loan has a lower monthly payment. For example, on a $200,000 loan, the difference between a 20- and 15-year loan would be approximately $190 a month.
Faster Payoff – For those concerned about the length of the 30-year mortgage, the 20-year loan offers a good alternative. Payments to the principle of the loan increase quicker than a 30-year mortgage. Of course, when deciding between a 15-, 20-, or 30-year term, the key is deciding what customers can reasonably afford on a monthly basis.
An ideal candidate for a 20-year loan is a borrower who would prefer to pay off the mortgage faster than the 30 year, but who still desires to have a lower payment (compared to the 15-year mortgage) and a better rate (than the 30-year loan). Homeowners who originally had a 30-year mortgage may find it beneficial to refinance into a 20-year term.
Perhaps you haven’t promoted the 20-year mortgage because you weren’t convinced of the advantages for your customer base. However, it makes sense to include this program in your discussions with most borrowers.
You can create a side-by-side PowerPoint or other presentation of the strengths and weaknesses of the different loan terms. You might also include a brief notice on your website or in an e-mail bulletin so that your customers are aware of the 20-year loan option.