The 20 Year Mortgage Alternative

Are you thinking about refinancing your 30 year mortgage but don’t really want to extend it out a full 30 years? Are the monthly payments associated with a 15 year mortgage more than you want to take on? Maybe a 20 year fixed rate mortgage is the answer.

You get the benefit of saving thousands of dollars in interest payments because of the shorter term. The disadvantage is that the monthly payments would be higher than for a comparable 30 year loan.

But sometimes the increase is small, said Stephen Habetz, the president of the in Westport, Conn.

For instance, a borrower who took out a $1 million loan four years ago at the prevailing rate of 5.875 percent, Mr. Habetz said, would have a monthly payment of $5,915. The remaining balance today would be $945,000. That same borrower could now, with a good financial profile, qualify for a 20-year mortgage at 4.75 percent with no points, he said.

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Assuming refinance charges of $5,000 were added into the new loan, the new payment would be $6,139, or $224 more than the old loan. But, Mr. Habetz added, “with a 15-year loan, at the current rates, the payment is $7,251, which is a lot more painful.”

By switching to a 20-year loan, the borrower would pay off the mortgage six years sooner than the current schedule, saving nearly $380,000 in interest payments. Even if the borrower sold the home in five years, he or she would still have built $66,000 more in equity with the new loan than the old one, Mr. Habetz said.

He said that since interest rates on 20-year loans dropped to current levels about a month ago, the mortgages have grown in popularity among borrowers of jumbo mortgages — loans of more than $729,750 in areas with the highest-cost housing.

Demand has been especially strong, he said, among borrowers with loans of more than $1 million, because that is the threshold beyond which borrowers cannot deduct mortgage interest from their federal income taxes.