For first-time apartment buyers, a 30-year fixed rate mortgage is often the best loan option. The lengthier term means lower monthly payments, leaving new homeowners with more room in their budgets for other expenses.
However, as MarketWatch points out, taking out a 30-year loan requires you to pay more in the long run due to the accumulation of interest, while a 15-year mortgage means paying significantly less overall.
So how can you decide which is right for you?
"Everyone's situation is different," says Ace Watanasuparp of Citizens Bank. "The benefit of a 30-year fixed rate is that you have flexibility, because it's amortized on a 30-year schedule. But some people love the 15-year fixed because there's a big difference in terms of interest rates."
As of this month, the interest rate on a 30-year fixed mortgage is 3.95 percent, and 3.99 percent on a 30-year jumbo loan, which in New York City means a mortgage of more than $636,150, whereas the rate on a 15-year mortgage is 3.17 percent, and 3.75 for a 15-year jumbo loan, according to Bankrate.
"When you calculate the amount of interest you'll be paying on a 30-year, it's a lot—almost as much as the principal payments," Watanasuparp says. That said, he continues, you should only opt for a 15-year mortgage if you're confident that your cash flow won't change significantly, as you'll have to be able to keep up with your monthly expenses.
Robbie Gendels of National Cooperative Bank (a Brick Underground sponsor) says that when deciding which type of mortgage is right for you, you'll need to analyze not only your current situation, but also where you think you're headed.
"Ask yourself whether you are you planning to live in the home for more than three to five years, what stage you're at in your life, whether you are going to grow your family," she says.
As MarketWatch notes, if you don't end up staying in your home for long, a 15-year mortgage may be a better choice than a 30-year, because it allows you to pay off more of your principal and therefore build more equity. This comes in handy if you need to sell when property values are down or haven't increased significantly.
On the other hand, Gendels says, with a 30-year mortgage, you don't have to wait 30 years to pay it off.
"You could always make additional payments toward the principal at any time, which would result in getting rid of the loan in under 30 years," she says.
And should your financial situation change for the better, Watanasuparp says that some banks offer one-time recast programs, which allow borrowers to pay a lump sum of the principal on their mortgages. Monthly payments are then recalculated based on the lowered principal, which reduces the interest owed. To do this, buyers have to pay a fee of around $350, which is worth it to avoid the hassle and expense of refinancing. Note, though, that not all lenders offer this.
Watanasuparp and Gendels both emphasize that there is no right or wrong decision when it comes to choosing a type of mortgage.
"I don't make recommendations," Gendels says. "I educate my borrowers and they make their own decisions, based on their stress levels and what works for their budgets and lifestyles."
These rules of thumb generally hold true for both co-ops and condos, though it's worth keeping in mind that co-ops generally require at least a 20 percent down payment, whereas condos cost more overall, but can sometimes be bought with a 10 percent, or even a 5 percent down payment. Then again, banks are often reluctant to lend such a large portion of the apartment cost. In any case, you'll have more of the principal paid off the fastest if you get a 15-year mortgage on a co-op, but this option will obviously also entail having the most money up front and the most income throughout the duration of the mortgage.
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