Downsizing your home might be the right thing to do. But how do you know for sure? For starters, it will save you money. Here are some of the financial considerations involved in downsizing, and what you stand to gain or lose:
The Cost of Downsizing
If you live in a home that could sell for $250,000 and want to buy a smaller home for $200,000, note that real estate costs, taxes, insurance, moving costs and other fees could cut into the $50,000 you hope to save in the move. You may save only $10,000 to $15,000. You might also have to purchase smaller furniture -- beds, armoires, etc. -- to fit into bedrooms and other spaces offering less square footage than your former home. And you might need more storage space for extra items too, which means even more money down the drain.
However, a smaller home could save you between $400 and $700 a month on your new mortgage, property taxes, utility bills and other costs as well. It's worth weighing what you pay now against what you're willing to part with in the move. (See article: Understanding The Mortgage Payment Structure.)
The Benefits of Downsizing
When downsizing, know that you're moving into a home with less square footage. That means less maintenance and care -- cleaning, upkeep and fixes -- which means less money spent every year on home improvement. You're also significantly reducing your monthly payments on the mortgage. But what about other debts? Can you redirect the money you would have put into the house to pay off credit cards, loans and other such financial burdens? If you can throw that extra $400 to $500 towards these debts, you'll get them paid off much faster.
This is also an opportunity to put more money towards your retirement fund. You could invest money in an IRA or pre-tax retirement plan. Within 15 years of downsizing and living in a smaller home, you could have a significant amount of money saved. And who knows how much you could have in 30 years? (For related reading, see article: Retirement Savings: How Much Is Enough?)
The Steps to Downsizing
Does downsizing sound right for you? If you think the benefits of downsizing outweigh any potential costs or drawbacks, follow these simple steps:
Calculate all the costs. Figure out all of the potential costs -- moving costs, realtor fees, home improvement expenses etc. -- usually about 10% of your home's value. Budget that for your home before you hire a realtor and start looking for a smaller home.
Save up! Subtract the money you budgeted for upcoming realtor and moving fees from the total equity for your current home. Then find a new home that's worth less than that. The idea is to come out with savings. So, for example, if you find a home that's worth $150,000 and your home is worth $250,000, then you'll potentially save $75,000 in the transition (subtracting $25,000 for realtor and moving fees). (For related reading, see article: Do You Need A Real Estate Agent?)
Start the move. Get a realtor, start packing things up and make the move! Then you'll have all that money in savings.
The Bottom Line
It's quite likely that transitioning to a smaller home will save you money. Just do the math to make sure what you gain will exceed what you're giving up!
Disclaimer: The opinions expressed are those of HomeAdvisor and are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of any individual holdings or market sectors. This material does not constitute any specific legal, tax or accounting advice. Please consult with qualified professionals for this type of advice.
Investopedia and HomeAdvisor have or may have had an advertising relationship, either directly or indirectly. This post is not paid for or sponsored by HomeAdvisor, and is separate from any advertising partnership that may exist between the companies. The views reflected within are solely those of HomeAdvisor and their Authors.