Thinking about refinancing? Don't overlook the 20-year mortgage loan option.

You don't hear a lot about 20-year fixed-rate mortgage loans, and many lenders don't even advertise their lowest rates. But they can be a practical refinancing alternative for borrowers who can't afford the higher payments on a 15-year loan but don't want to stretch their payments back out over a 30-year period.

Who can benefit from a 20-year refinance?

A 20-year mortgage can be a particularly good choice for borrowers who've owned their home for several years and are looking to refinance out of their original 30-year mortgage or an ARM (adjustable rate mortgage) with a 30-year amortization.

If you've already been paying on your mortgage for six or seven years, there's a good chance that refinancing into a 20-year loan would not only allow you to pay off your mortgage faster, but lower you monthly payments as well. Of course, how much you can save depends on the interest rate you're currently paying and the new rate you obtain.

20-years or 15?

Historically, interest rates on 20-year mortgages have tended to lie about midway between those of 30- and 15-year home loans. These days, however, they tend to be lie closer to the 30-year rate - often about one-eighth of a percentage point (0.125 percentage points) lower.

Since 15-year rates are currently running much lower - as much as three-quarters of a percentage point (0.75 percent) below typical 30-year rates, those may be more attractive to those seeking the lowest rate possible. However, your monthly payments will be higher than on a 20-year loan because you're paying more toward your principle each month.

Figuring the savings

How much can you save? Suppose you took out a 30-year fixed-rate mortgage six years ago for $200,000 at 5.5 percent interest. With monthly payments of $1,135, you'd have that paid down to about $181,700 today. If you were to refinance $185,000 (including closing costs) into a 20-year fixed-rate mortgage at 3.875 percent, your new monthly payment would be $1,108 and you'd have knocked four years off the loan. If you'd been paying for more than six years, your new payments would be even lower.

By contrast, refinancing that same $185,000 into a 15-year fixed-rate mortgage at the much lower interest rate of 3.25 percent would produce a new monthly payment of $1,300. You'd be paying off your loan much quicker, but at a higher cost each month. Use an online mortgage calculator to determine which makes the most sense for you and your budget.

Yet another mortgage option

Another option that gets even less attention than the 20-year loan is a 25-year fixed-rate mortgage. These rates are almost never advertised, but they are available. Usually, the rates are the same as what the lender offers on 30-year loans - they're simply calculated to amortize in 25 years. However, they can make sense for some who bought their home only a few years ago and wants to keep close to the same amortization schedule when they refinance.

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Published on October 18, 2011