Pay off new mortgage in four years?

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Dear Dr. Don,
We want to get your advice on our situation. Our mortgage balance is $130,000 and we have no other debt. We are both 48 years old. We have a chance to sell our home for $185,000, which will allow us to downsize to a smaller home. By using the equity we make from selling our current home and putting some more money with it, we only need to finance about $30,000 on the new home, and we could have that paid off in about four years.

Do you think this would be a smart option for us?
— Cathy Calculates

Dear Cathy,
As long as you don’t leave yourself short in your emergency fund by making such a large down payment on the new home, I don’t see a flaw in your plan. I think it’s a sound financial goal to have the mortgage paid off by the time you retire.

You’ll want to make sure that your loan doesn’t have a prepayment penalty, since you’re looking to pay it off in just four years. If that payoff schedule is realistic with your budget, a 5/1 adjustable-rate mortgage, or ARM, is a way to capture a lower interest rate than a 15-year fixed-rate mortgage.

Financing a $30,000 mortgage may put you below a lender’s minimum mortgage size, so you may have to talk to several lenders before finding one willing to underwrite your mortgage. Find out before filling out a loan application. Multiple loan applications can hurt your credit score if they’re not done in a relatively short time span. The myFICO publication, “Understanding your FICO score,” puts it this way:

The score allows for “rate shopping.”

If you’re looking for a mortgage, student loan or an auto loan, you may want to check with several lenders to find the best rate. This can cause multiple lenders to request your credit report, even though you’re only looking for one loan. To compensate for this, FICO scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur. When you need an auto, student, or home loan, you can avoid lowering your FICO score by doing your rate shopping within a short period of time, such as 14 days.

Depending on the vagaries of your local real estate market, your existing house may have taken a bigger price hit than the smaller house did. That’s one disadvantage of downsizing in a down market, but downsizing before a majority of baby boomers make that decision can make this an opportune time to make the move.

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