Downsizing your home could be the right thing to do. But how do you know for sure? For starters, it will save some money. Here are some of the financial considerations related to downsizing, and what you stand to gain or lose:
If you live in a house that could sell for $250,000 and you want to buy a smaller house for $200,000, keep in mind that real estate costs, taxes, insurance, moving costs and other fees could reduce the $50,000 you expect to save on moving. You can save just $10,000 to $15,000. You may also need to purchase smaller furniture (beds, closets, etc.) to fit in bedrooms and other spaces that offer less square footage than your previous home. And you may also need more storage space for additional items, which means even more money that you’ll need to spend.
However, a smaller home could save you $400 to $700 a month on your new mortgage, property taxes, utility bills, and other costs, too. It’s worth weighing what you’re paying now against what you’re willing to part with on the move.
When you downsize, take into account that you’ll be moving to a home with fewer square feet. That means less maintenance and care: Cleaning, maintenance, and repairs, which means less money spent each year on home improvements. You’re also significantly lowering your monthly mortgage payments. 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 financial burdens? If you can throw in that extra $400 to $500 to pay off these debts, you’ll pay them off much faster.
This is also an opportunity to invest more money in your retirement fund, but if what you are looking for is downsizing a senior’s home so you can invest money in an IRA or retirement plan on a pre-tax basis, let me tell you that this could be a wise decision. Within 2-5 years of downsizing and living in a smaller home with your loved ones, you could save a great amount of money.
Do you think downsizing is right for you? If you think the benefits of downsizing outweigh any possible cost or inconvenience, follow these simple steps:
Calculate all the potential costs: moving costs, real estate agent fees, home improvement expenses, etc. which are usually around 10% of the value of your home. Make a budget for your home before you hire a real estate agent and start looking for a smaller home.
Save! Subtract the money you budgeted for the future realtor and show it from the total equity in your current home. Then find a new home that is worth less than that. The idea is to save. So, for example, if you find a house that’s worth $150,000 and your house is worth $250,000, you’ll potentially save $75,000 in the transition (subtracting $25,000 for realtor and moving fees).
Start the move. Get a real estate agent, start packing and moving on! Then you will have all that money in savings.
It is quite likely that the transition to a smaller home will save you money. Just do the math to make sure that what you earn will exceed what you’re leaving!