Should I Downsize My Home: How to Decide

If you drive around town, you’ll likely see new houses popping up. And they’re getting bigger all the time. Back in 1973, the average home was 1,660 square feet.(1) Today, new homes run about 2,600 square feet in size.(2) That may feel huge to you, especially if your kids already left the nest!

So how do you know if you need to downsize? Could it help you prepare for retirement? And why do you feel so attached to your home?

If you’ve been asking questions like these, you’re not alone. The good news is that you get to decide whether or not your home sweet home is enough—or too much—for you and your family. Here are some questions to ask and things to consider before you make any big decisions about your house.

Why Should I Downsize My Home?

 

People decide to move for lots of reasons, and downsizing is no different. What’s right for you might not be right for your next-door neighbor, or vice versa. Here are a few examples of why you might decide to downsize:

1. To supercharge your retirement fund.

Are you putting 15% of your gross income toward retirement? If not, lowering your mortgage payment by opting for a smaller home could move the needle significantly!

James and Christy are in their 40s with more house than they need and a retirement fund that’s hurting. Their kids have left the nest, and while the couple’s $1,900 monthly mortgage payment is feasible, it doesn’t leave much for investing. So, they have decided to downsize to a smaller home.

Should I Downsize My Home: How to Decide

Their new 15-year fixed-rate mortgage has a monthly payment of $1,200. This downsize has allowed James and Christy to put that extra $700 a month toward their nest egg. After 25 years, that investing account could top $900,000. And if they wait until 70 to retire, they could end up with $1.5 million. Downsizing now sets them up to enjoy the retirement of their dreams later.

2. To kick debt to the curb permanently.

Let’s say you’re among the millions of people who have student loans hanging around their neck. If you have the average student loan debt of a recent college graduate, that means you owe around $37,000.(3) With a 6% interest rate and a minimum monthly payment of $250, you’ll be carrying the burden of that loan for 22 years. That’s a long time!

Now, if you downsized your home, cut your monthly mortgage payment by $300, and added that $300 to your monthly student loan payment, you’d say goodbye to Sallie Mae in just under seven years. On top of that—you’d be saving over $22,000 in interest!

And what if you took that $22,000 you would have paid in interest and put it into a Roth IRA for 30 years? You’d have over $380,000! That money could help cover any out-of-pocket medical bills in retirement—or be put toward other needs or dreams you might have. The point is, you’d be keeping your money in your bank instead of somebody else’s.

3. To pay off your mortgage.

Nobody likes having a mortgage payment month after month. After month. The good news is that you don’t have to stay a slave to your home loan. You could sell your current house and purchase a smaller one with cash. Imagine how much money you could be putting toward your retirement if you didn’t have a mortgage payment!

Juan is a single dad taking care of two kids. He’s a successful manager at his company, but money is tight. He’s worried he won’t have enough for retirement, even though he’s participating in his employer’s 401(k) plan. So, he crunched the numbers and decided to sell his home.

With the equity from the sale, he paid cash for a smaller home. Now, he’s debt-free and putting about $600 a month away for retirement. In 25 years, he could have more than $750,000 in his nest egg—and that doesn’t include the money that his employer’s 401(k) match will earn!

4. To make living more affordable.

Even if your mortgage is reasonable, you may still choose to downsize to decrease your monthly bills and make overall expenses more bearable. In 2016, the average electric bill was $113 a month in the U.S.(4) If you move to a smaller home, you could save money because you’re heating and cooling less square footage.

But a lower electricity bill isn’t the only way you’d profit. You could also save on or eliminate expenses related to gas, pest control, mowing, HOA fees, homeowner’s insurance, and maintenance. Added up, you could save some serious cash that you could then put toward retirement.

Obviously, those aren’t the only reasons people downsize. Some want to move closer to family. Others experience divorce or job loss. And there are lots of people who want a more eco-friendly home. Whatever the reasons, make sure you recognize both the pros and cons of downsizing.

What Should I Consider Before Downsizing My Home?

 

The cost isn’t the only factor that will determine whether or not you’ll say goodbye to your current house. Here are some other issues to think about:

Long-term needs

Will you need more or less space in the next 10–20 years? Will you be able to maintain the landscaping and yard? What if you or your spouse became unable to climb stairs? If you had to take care of an aging parent or another loved one, do you have a good space to do so? These questions might make you a little uncomfortable, but you need to think about what you’ll need in the future. It will help you determine whether you’ll need to downsize at some point—maybe even sooner than you’d planned.

Hidden costs

Downsizing your home may mean a smaller mortgage payment, but there are other costs you might not think about. For example, do you have to do home repairs before you sell? Will your furniture fit in a new place? Also think about property taxes, insurance, and HOA fees. Those could cut into the cash you’re trying to make.

Tax implications

If you make a significant profit on the sale of your home, you may get hit with a capital gains tax. The IRS will tax any gains of more than $500,000 for a couple or $250,000 for an individual.(5) For example, let’s say you and your spouse bought a home 15 years ago for $300,000. Since then, its value has increased because of development in your area. Now the home is worth $900,000, giving you a profit of $600,000. After subtracting the exclusion of $500,000, you’d likely be taxed on $100,000. However, there are quirky exclusions to this rule, so talk with a tax pro before you decide to sell.

Your motives

If you’re not so keen on moving to a smaller space, you need to ask yourself why. Are you trying to keep up with the Joneses? Do you worry about what people might think if you bought a smaller home instead of a bigger one? In today’s culture, a bigger home is often seen as a status symbol. But don’t hang on to more house than you need just to impress people. That status won’t pay the bills in retirement.

Should I Downsize My Home: How to Decide

Your emotions

Your head may be telling you downsizing is a smart idea, but your heart may be telling you not to do it. That’s probably because you’ve built countless memories within those four walls. You may feel sad at the thought of starting over somewhere new. But remember, your memories don’t disappear when you move to a different place. You get to build new memories with those you love, no matter where you live.

Should I Downsize My Home: How to Decide

Once you’ve worked through the finances and emotions of downsizing, you can make a wise decision. If you decide to sell your home and move into a smaller place, I highly recommend talking with a real estate agent who knows the ins and outs of the industry. And if you need help finding the best agent for you, check out our real estate program. Just type in some information, and you’ll get a list of pros in your area.

Not only will they help you get the most for your home, but they’ll also work with you to make sure the process is as smooth as possible. Plus, they can help you find a new place that’s perfect for your situation.

Want an Expert’s Help?

Downsizing may turn out to be a great move for your future. Find a real estate agent in your area to get started! Not only will they help you get the most for your home, but they’ll also work with you to make sure the process is as smooth as possible. Plus, they can help you find a new place that’s perfect for your situation.

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