How to Get the Best Loan when Downsizing Your Home

When you are downsizing your home, you have an opportunity to achieve a very affordable mortgage program. You have this opportunity because you are selling a large asset in exchange for a smaller asset. This gives you flexibility up front. Use the extra liquidity you have to get the cheapest mortgage in the long run. This means that even if you do not recognize large savings on the front end, you should select a plan that will cost you the least amount from initiation to maturity.

Place a Large Down Payment

A first-time home buyer rarely has the cash to place a large down payment. Even as that home buyer upgrades to a new home, he or she will consistently have to stretch profits from a home sale in addition to savings in order to truly purchase a more expensive home. This cycle continues throughout a homeowner's life until, perhaps upon retirement, the homeowner decides to downsize. If you are in this position, you are lucky enough to have a huge amount of cash from the sale of your last home to apply toward the purchase of a smaller, more affordable space. This gives you the flexibility to put 20 percent or more down on the home, reducing your total mortgage, avoiding mortgage insurance and getting a better interest rate.

Buy Down Your Interest

The extra cash you have at the beginning of your loan can help with more than just a down payment. Your lender will typically offer you the opportunity to buy down points on your interest. This keeps your monthly payments low for a few years. In the long run, it offers even more savings because you are actually receiving a discount on your interest if you pay up front. Ask about a buy-down option for the beginning years of your mortgage. With this option, you will save thousands over the life of your loan.

Select a Short Mortgage

Since your mortgage loan will be smaller with a large down payment, you may consider taking a loan that is shorter than the standard 30 years. Shorter loans come with lower interest rates. These rates also compound less frequently over time, making the realized APR over the life of the loan much lower. If you can afford to pay the loan off in 10 or 15 years, you will be living debt free in your new home much sooner. This is particularly advantageous if you are approaching retirement.

Elect High Monthly Payments

The only way to shorten the length of a loan is to pay more monthly. If you are earning the same income you previously earned, you can afford to pay the same mortgage on your new, downsized home as you did on your previous residence. Budgeting for the mortgage as if it were much larger is a great way to assure you pay down the loan quickly. Since you already lived on this budget for years, you will notice no real change in your spendable income in the short run.