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You've no doubt heard that interest rates are at historic lows, making now a smart time for New Yorkers to shop for a mortgage. For borrowers, one of the most important decisions is whether to pick a 15-year or 30-year fixed-rate mortgage, since the time it takes to pay back the bank will influence your rate, your monthly payments and ultimately how much money comes out of your pocket.
But what exactly are the differences? And why would you choose one timeframe over another? Read on:
YOUR MONTHLY NUT
The rule of thumb is that the longer the term of the loan, the higher the interest rate—but monthly payments are lower, since you're taking more time to pay off the mortgage. (Currently, rates are at 3.21 percent and 3.96 percent for 15-year and 30-year mortgages, respectively.)
So, say you're buying a $1 million apartment, putting 20 percent down and borrowing $800,000. Your monthly mortgage bill would be $4,868 on a 30-year and $6,672 on a 15-year, or a difference of about $1,800 a month.
As long as you can afford the loan, it's all the same to co-op and condo boards, experts tell us. "It really just comes down to debt-to-income ratio," says Sunny Hong, a mortgage banker at DE Capital Mortgage, meaning that you have to earn enough after factoring in your other debts to cover the payments.
YOUR TIMELINE FOR SELLING
You may want to opt for a 15-year loan if the goal is to pay down the mortgage quickly, which tends to be more common among "people who plan on staying in the home forever and who want to pay off their mortgage with the least amount of interest possible," says Hong.
That said, if that's not a factor, most mortgage experts suggest a 30-year loan for safety's sake. "Things change. You could lose your job, investments could go bad. If you keep your payments relatively low, it won't hurt as badly if that happens," says Rolan Shnayder, a loan officer at Citizens Bank.
Also, if your aim is to get rid of your mortgage quickly, you can get a 30-year and pay more of the principle each month, suggests Robbie Gendels, a senior loan officer in the New York City office of National Cooperative Bank. (Plus, in most cases there are no prepayment penalties.)
Down the line, it's also possible to refinance a 30-year mortgage into a 15-year, which Gendels sees happening more and more now, as borrowers take advantage of the rock bottom rates. "I see this a lot when rates drop, and it tends to happen about five or seven years after an initial purchase. That's when people start to look at their mortgages again," she says.