Downsizing Your Home Could Be A Terrible Idea For Your Finances

moving truck bye house people

Photo: Instagram/elyse33

At some point, many older homeowners think about reducing their mortgage loans or living costs by downsizing their homes.Maybe they’re empty nesters with kids off to college or starting their own families, and a big house is simply too much to keep up.

Perhaps retirement savings are still behind due to the financial crisis, and swapping a three bedroom house for a one bedroom condo would provide the extra funds needed to catch up.

Regardless of the reason, the prevailing assumption is that downsizing your home means reducing your overall cost of living.

However, while this is sometimes the case, empty nesters and retirees who are considering a move should first do the maths — they may find that in their situation, there are no savings to be had. In fact, they could end up paying more.

How Downsizing Your Home Aids in Saving Money

In 2007, Frank Risalvato and his wife sold their three-story, 4,100 square foot home on one acre of land in New Jersey and moved into a two-story, 3,300 square foot property in Charlotte, North Carolina.

Aside from being closers to a better selection of universities for their college-aged children (and a whole lot more sunshine), the Risalvatos also gained major savings, including $9,400 in annual property taxes and $3,100 in heating/cooling costs each year.

In fact, according to a recent survey by the Demand Institute, more than 40 per cent of Americans ages 50 to 64 plan to move within the next five years. Many of these older Americans will opt for a smaller place with the goal of saving money – and it’s no wonder, as there are numerous potential financial benefits to downsizing.

Potential Savings for Empty Nesters and Retirees

Smaller mortgage loan: A smaller home is usually a less expensive home, which means homeowners can cut the cost of financing by downsizing their digs — or eliminate mortgage payments completely.

Fewer utilities: Less square footage means it costs less to heat your home and keep it well-lighted.

Less maintenance: It’s also less work; fewer rooms and a smaller yard mean you don’t have to hire help to assist with upkeep.

Fuel savings: Some retirees move to neighborhoods with better “walkability,” allowing them to drive less and save on gas and car maintenance.

…And Why It Often Doesn’t

It all works out wonderfully — in theory. However, in practice, many downsizers discover there are a host of expenses to deal with after moving that they hadn’t considered. In fact, CPA Sally Herigstad says that unless you can cut total expenses by 25 per cent or more, “Don’t bother.”

She explains, “By the time you factor in selling costs, including commissions, moving expenses, and the costs of buying or renting a new home and buying furniture to go with it, you won’t be ahead. If you realise less from the sale of your old home, you might even be farther behind.”

Important Costs to Consider Before Downsizing Your Home

Drop in home value: If your local housing market was hit hard by the mortgage crisis, your home could be worth significantly less today than when you purchased it. Though you can sell and use the proceeds to buy a cheaper house, resulting in thousands of dollars left over to spend as you wish, those savings are largely offset by the loss you’d take on the original purchase.

Fees and commission: Selling your home and buying a new one also means hiring a realtor and paying them for their services.

Mortgage loan closing costs: Additionally, though you may cut the cost of your mortgage by swapping into a cheaper home and refinancing, there are various closing costs and fees associated with securing new mortgage terms that may cancel out those savings.

Moving expenses: Arguably a negligible expense compared to others, you must still factor in the cost to pack up all of your belongings and transfer them to your new property.

Cost of living: A 2009 Boston College study found that a large majority of older Americans who relocated stayed within 20 miles of their previous homes. However, this means they will pay comparable prices for utilities, food and similar necessities, resulting in little to no savings in this area.

New fees: Opting for a small condo instead of a single family home may result in also taking on new, expensive Homeowners Association fees. Not to mention, downsizing requires finding room for all the stuff you’ve accumulated over the years in your big home, which may result in paying for storage if you’re not comfortable with getting rid of it (which, by the way, is a huge waste of money).

Lifestyle costs: Finally, realise that moving into a small house can cost you in other ways, depending on your previous lifestyle. For example, moving out of the pricey city and into a small town could be less expensive, but also more isolating, requiring more travel to see friends or do shopping. Additionally, a smaller home means less room for entertaining, grand kids to run around in or adult children who may wish to move back in temporarily.

Some homeowners may find that the number of new expenses they could face as a result of moving will far outweigh the potential savings, requiring them to find alternatives to downsizing for saving money in retirement. It’s important to note, however, that you shouldn’t necessarily let a lower home value alone stop you from downsizing.

Herigstad also points out, “All things being equal, you’re better off selling one house and buying another in a down market than in a booming one. Many selling and purchasing costs are based on the home prices, so they will be lower now than a few years ago.”

Empty Nesters’ Solution Could be Renting

There’s no rule that says once you’re a homeowner, you must remain a homeowner. Some empty nesters and retirees who decide to downsize trade a house for an apartment to avoid many of the above expenses.

Aimee Elizabeth, author of Poverty Sucks! How to Become a Self-Made Millionaire, advises, “In general, renting is usually cheaper than buying. When you factor in the ever-rising costs of taxes, insurance, repairs and maintenance, on top of a mortgage payment, it’s much less costly and less stressful to rent.”

Since fewer costs and less stress are exactly what the majority of retirees are after, renting may be the solution to downsizing without the money and hassle of buying another property.

Plus, as Jeff Brown of explained on Yahoo!, “This could be appealing if you had a special need for that extra cash, or if you saw a juicy investment opportunity. If you were willing to risk the stock market, the extra $200,000 might grow enough to offset some of what you’d pay in rent.”

Of course, there’s no one-size-fits-all answer here. So when deciding if downsizing will benefit your savings, and whether you should buy or rent, Elizabeth adds, “For a retiree or empty nester, it really depends on where they currently live to decide if downsizing makes sense right now. Certain parts of the country were not affected by the real estate bubble at all. Other parts, like where I live in Las Vegas, are just starting to recover…you need to run the numbers.”

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