What is a 25-year mortgage?
A 25-year loan allows the borrowers to pay the mortgage back in 25 years. Your interest rate will be fixed for the entire loan term with the 25-year fixed-rate mortgage. You only need to manage taxes and mortgage insurance premiums for increasing loan costs.
It is not a common loan for applicants to take. A 25-year mortgage may seem to be quite the same as a 30-year mortgage. However, it still allows you to cut your mortgage loan term by five years and has interest payments lower than for the longer-term mortgage.
Urban Institute states that 30-year fixed-rate mortgages are the most popular home loan term. Very few homebuyers take a 25-year fixed-rate mortgage to purchase their house. It is easier to qualify for a 30-year fixed-rate make and pay lower monthly payments.
Adjustable-rate mortgages with a 25 years loan term have five years of fixed interest rate payments. After that, the interest payments will change every year according to the Prime Rate.
Types of 25-year Mortgages
Not all lenders have 25-year mortgage options. However, if you are determined to take it, there can be conventional loan offers and government-backed loans.
- Conventional loans. These loans are provided by banks, credit unions, and private lenders. The common requirement for applicants is to have at least a 650 credit score. With a conventional loan, you are required to make a down payment of 20%. If you contribute less, there will be private mortgage insurance premiums. They are rolled into your monthly payment or are part of the closing costs. Once your loan balance reaches 78%, the lenders remove private mortgage insurance premiums.
- Government-Backed Loans. These home loan options allow applicants with lower income and credit scores to purchase a home. FHA loan offers, for example, allow borrowing with a credit score of 500 if you make a 10% down payment. Other government-backed loans for a 25-year loan term are USDA and VA loans. Conventional loan offers can be backed by Fannie Mae and Freddie Mac. Mortgage insurance premiums on government-backed home loans are charged if your loan balance is over 80% of the home's value. It accounts for 0.80% to 0.85% of the loan amount. You will pay insurance premiums for the entire life of the loan as part of monthly payments.
The reasons to take a 25-year fixed-rate mortgage
This is a shorter-term loan compared to a 30-year fixed-rate mortgage. You can make five years fewer interest payments and save money on it. The interest rate is also slightly lower for these mortgage loans.
A 25-year mortgage also has more affordable monthly payment amounts. Compared to 10-, 15-, or 20-year mortgage options, you will get smaller monthly mortgage payment amounts, making the loan more suitable for lower-income borrowers.
If you take a loan amount of $350,000 and make a 20% down payment, the mortgage options will be the following:
- A 15-year mortgage with a 5.6% interest rate will have a monthly payment of $2,303, while the total interest payments will account for $134,489.
- A 25-year mortgage with a 6.4% interest rate will have a monthly payment of $1,873. The total interest you will pay will be $281,936.
- 30-year fixed-rate loan with an interest rate of 7.1% will have a $1,882 total monthly payment. The total interest payments will be $397,408, which is higher than the loan amount.
The interest rates are estimated based on the average rates.
Here, you see that you will overpay the least amount for a 15-year mortgage, while a 30-year mortgage has the highest interest payment amount. A 20-year mortgage will be almost equal to the loan amount you take, and the monthly payment is slightly higher than for the 30-year mortgage.
Pros and Cons
Pros
- The monthly payment amounts are more affordable compared to the shorter-loan terms.
- A slightly lower interest rate than on a 30-year mortgage.
- You can pay off your mortgage five years earlier than a 30-year mortgage and save money on interest.
- You can qualify for a larger loan amount because of a longer term.
Cons
- The lowest interest rates are offered for the shorter mortgage options, like 10- and 15-year.
- You will gain equity on your mortgage slower.
- The savings on mortgage interest rates are larger on shorter-term mortgages.
- There are not many lenders ready to offer you a 25-year mortgage. You will have to look for an option available in your state of residence.
Mortgage Costs
Fixed-rate mortgages have a traditional amortization schedule. The amortization schedule shows how many payments you will make for the entire life of the loan and when you pay it off. You can estimate how much will be applied to your loan principal and interest.
The loan costs comprise your principal, interest, taxes, and mortgage insurance. If you contribute a lower than 20% down payment, you will have to pay a monthly mortgage insurance premium.
During the first year of your 25-year mortgage, the larger part of your monthly payments will be applied to the interest rate coverage. The interest payments will decrease gradually as your loan-to-value ratio grows.
You can ask your mortgage lender to apply the additional payment to your principal loan balance to lower monthly payments faster.
How to get a 25-year mortgage?
Qualification requirements
To qualify for a 25-year mortgage, the applicants should:
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Contribute a minimum of 3% - 3.5% down payment
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Have a credit score of at least 580
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Have a debt-to-income ratio (DTI) of no more than 40% - 45%
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Cover the closing costs of 3% - 6% of the home's purchase price
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If you are applying for an FHA loan, you must pay an upfront mortgage insurance premium.
Insurance requirements
For a conventional 25-year fixed-rate loan, a 20% down payment is enough not to pay insurance premiums.
If you put a lower down payment, you must pay monthly insurance premiums. PMI usually adds 0.5% to 1% to the total cost of your mortgage annually.
You can request a cancelation of your private mortgage insurance after achieving a 20% equity on your residence. The mortgage lenders can cancel PMI automatically when you reach 22% of equity or 80% of the loan-to-value ratio.
FHA loan options always require an upfront mortgage insurance premium of 1.75%. If you contribute a down payment of 10% for the 25-year mortgage, your mortgage insurance premiums will be paid monthly for 11 years. In case you do not make a down payment, loan insurance premiums must be paid for the entire life of the loan.
How to apply for a mortgage?
A 25-year mortgage is not widely available. It may take time for you to find mortgage lenders offering such options.
The banks usually do not offer 25-year loans in the US. You can find some home loan options from private and online lenders, such as Rocket Mortgage, or opt for Veterans United to get a VA loan.
For example, Rocket Mortgage, an Equal Housing Lender, has three options for a 25-year mortgage: conforming fixed-rate, FHA fixed loan, and VA fixed loan.
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The interest rate for a conforming 25-year fixed-rate mortgage is 6.375%
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The interest rate for FHA loans fixed-rate is 5.875%
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The interest rate for VA loans fixed-rate is 5.875%.
If you decide to get a 25-year fixed-rate loan, check your eligibility or get a quote from the mortgage lender. This will allow you to compare the loan terms you can get with the other loan options.
An application is usually available on the mortgage lender's website. You can submit an application form and receive the decision from home. The decision is based on your creditworthiness. If your income is sufficient to cover mortgage payments, your credit score is high, and your DTI ratio is lower than 40%, you will likely receive a mortgage with a good interest rate.
The closure and financing may take from 10 to 45 days, depending on your lender.
