Is Downsizing Your Home a Good Idea?

While homeowners have many different reasons for wishing to move into a smaller place, downsizing often presents an opportunity to save money and enjoy an enhanced lifestyle—provided you steer clear of common downsizing mistakes. Let’s dive in and explore this topic a bit more.

How to know if it’s time to downsize your home

For starters, you’ll need to ask yourself why you’re considering moving into a smaller home. Here are five indicators that can—and likely should—nudge you to downsize.

Your mortgage payment takes a big chunk out of your paycheck
Generally speaking, you should spend a maximum of 28% of your monthly gross income on your mortgage payment. Therefore, if your gross income is $7,000 a month, no more than $1,960 should go toward your monthly mortgage: which includes principal, interest, property taxes, and homeowner’s insurance. However, exceptions to the “rule” apply if you temporarily exceed this threshold due to a job loss or time off to care for family.

You can’t keep up with maintenance and operating costs
The latest American Housing Survey shows that, on average, those with owner-occupied, single-family detached homes spend an average of $5,540 to operate a home on an annual basis ($9,240, if you include property taxes)—$950 of which is spent on maintenance. Obviously, these expenses will vary based on your geographic location and the age, size, and type of home. You’ll also naturally spend more during some years than others. That said, regardless of how much you actually spend, you should probably downsize if you can’t afford to keep up with the maintenance and operating costs of your home.

You can’t enjoy the lifestyle you want
The decision to downsize also has a lot to do with your goals and desires. Want to pay off more debt? Save more money for retirement? Enjoy more frequent dinners out or vacations with friends? If you find yourself struggling to enjoy the lifestyle you want to live now (or in the future) because your home expenses are too high, downsizing is often a top option.

You’re not maximizing your space
You should also consider downsizing if you’re not fully using the space (e.g., multiple rooms) you’re paying for. This is especially common with empty-nesters, who may have needed this extra square footage at one point in their lives but no longer require the luxury. If you don’t really need this extra space anymore for whatever reason, certainly consider downsizing.

Your house has appreciated considerably
If your home has appreciated enough for you to make a nice profit and you can find another less-expensive place to live, this is another reason to make a move. Married couples can exclude up to $500k in capital gains from their primary residence, so anyone who knows they are reaching this threshold should consider selling before a tax burden sets in.

Steps you should take before downsizing your home

If you do decide to downsize, consider taking the following steps to ensure you don’t overestimate or underestimate your potential revenue and expenses. If you skip these steps, you may be forced into making significant changes to your envisioned plans.

Properly determine the value of your home
You can take several approaches to determine your home’s value. For example, an online estimator can give you results in mere minutes; however, the corresponding accuracy isn’t the best. Thankfully, local real estate agents can provide you with a more accurate appraisal because they can consider the assessed value, comparative sales, and any home features and upgrades that an online algorithm cannot. You can also ask your realtor what you can do to increase the value of your home, a great idea to maximize value. Nevertheless, an even better option is to hire a professional appraiser. Although this will cost you a few hundred dollars, he or she will be certain to consider each and every property feature that impacts value.

Understand the costs associated with a home sale
Once you have a realistic estimate of your home value, you’ll need to assess costs connected to selling your home: including closing costs and taxes. 

Following the home inspection, a buyer can request modifications or repairs. Thus, with the exception of cosmetic changes or upgrades, the seller may be on the hook for items such as pest damage or electrical, plumbing, roof, or foundation issues.

Closing costs—which, according to bankrate.com, can range anywhere from 2% to 7% of the home’s sale price—can include payment for the mortgage balance, property transfer taxes, recording fees, and attorney costs. You’ll also need to pay any real estate commissions at closing, ringing in at up to 6% of the home’s sale price.

It’s also important to understand tax implications, knowing that Uncle Sam allows most couples to exclude up to $500,000 in gains from their taxable income (depending on how long you’ve lived in the home).

Sell before you buy
Depending on your situation, it may make sense to sell your current home before you downsize. Doing so will help avoid the temptation to settle for less than you would otherwise fetch since there is no financial pressure to fund the closing of your new home. Otherwise, if you don’t have enough saved, you may require a bridge loan (a short-term loan, usually for a few weeks) to close on the new home. These are sometimes difficult to obtain and are often very expensive.

Downsize your belongings
This is often an emotional process and, depending on how many sentimental items you own, is sometimes quite overwhelming. Therefore, it’s best to start early and not rush. Begin with smaller items and then move on to furniture in rooms your new home lacks: such as a third bedroom or office.

Downsizing your belongings will also help minimize moving costs. Based on a two-to-three bedroom move, Moving.com claims the average cost of a local move is $1,250 while that of a long-distance move (of at least 1,000 miles) is just under $5,000. As you can see, moving isn’t inexpensive and corresponding costs must factor into your calculations.

Know that home expenses won’t disappear in retirement
Just because you’re moving into a different home doesn’t mean you’ll avoid repairs and/or renovations. For example, it’s important to remember that most houses aren’t designed with old age in mind. Therefore, if you require wheelchair accessibility or need to expand a bathroom or convert existing space so all key areas are on one level, related expenses can quickly pile up. Even a brand-new home isn’t immune to accidents and weather damage that homeowner’s insurance may not cover.

The bottom line on downsizing your home

Downsizing your home is often an excellent opportunity to save money and enjoy a better quality of life. That is, of course, if you can avoid many unexpected pitfalls that can potentially derail your plans.

———

Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. To schedule a no-obligation consultation with one of our financial advisors, please click here.

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.