It’s only natural to think moving up in life also means buying a bigger home. But it’s not always the case! In reality there are plenty of amazing benefits to downsizing and moving to a smaller home. The majority of American families have lots of room to downsize their home without selling themselves short.
Let’s take a look at the numbers: according to National Association of Realtors, the average new single-family home is about 2,300 square feet. In 1950, however, most new homes were under was 1,000 square feet—and most families were larger in those days!
There are several upsides to downsizing. Today we’ll be your guide as you think about whether downsizing is the right move for you.
As you approach retirement, it becomes more and more important to pay off your debts. You can reduce your debt load and have more fun instead of being limited by your house.
Ideally, your debt-to-asset ratio would be at zero as retirement looms. The goal is to eliminate debt and have your mortgage paid off. It’s all about minimizing your monthly obligations, and downsizing to a smaller home is a great way to do just that.
Reduce Your Maintenance
Downsizing to a smaller house means less maintenance and upkeep for many homeowners. Take a look around your home and note all the money and time you spend on maintenance alone. What are your electricity costs like? Which parts of your home need repairs or upgrades in order to run most efficiently? How long does it take to mow your lawn (or how much do you pay to have someone else cut it)?
Many of these expenses can be reduced or eliminated by downsizing your home.
Invest The Proceeds
Another possibility is to purchase a smaller home with the sale proceeds of your current home, eliminate debt, and then put the leftover funds into an investment account.
Or, you might take your sale proceeds and put them toward a renovation of your new home.
Whatever plan you devise should take into consideration what’s most important to you. It’s perfectly okay to create a strategy that makes the most sense for you and your family.
Increase Your Income
Downsizing can feel like you just got a raise! Your reduced expenses will free up income to help pay property taxes, insurance, upkeep, and utility bills. Living off the additional cash flow can even help you put off using Social Security benefits as a source of your income.
Let’s say you sell your current home and make a profit of $500,000. If you then downsize and purchase a $300,000 home with the cash and you’re mortgage-free. Don’t forget you’ll still have property taxes and insurance to plan for, as long as you own the home.
Prioritize Your Goals
When you have the extra cash in hand from selling your home, it’s not the time to be impulsive! Instead, be sure to identify your financial goals, set priorities – and stick to them. When you have a solid plan in place you’ll be more likely to make good decisions along the way.
Don’t Forget About The Capital-Gains Tax
Particularly if you’ve lived in your home for a significant amount of time in a high-cost housing market, a large portion of your equity could go to federal and state capital-gains taxes.
Remember that you can exclude up to $500,000 of profit from the sale of your home if you’re married filing jointly, or $250,000 if you’re single. Your profit is the sale price of your home minus selling expenses and its tax basis. In other words, it’s what you paid for your home originally plus the cost of any improvements you made. If you estimate that you’ll have more than $500,000 in profit, consult your records of home improvements.
Downsizing Might Be The Best Option For You
Although downsizing your home might not make sense in every situation, it’s always worth looking into if saving money and simplifying life are valuable to you. If you’re not sure where to start, ask an experienced real estate agent to help you figure out what your current home is worth and explain your options for reducing costs. The right real estate agent will be familiar with what it takes to get a great price for your current home and negotiate the very best deal on your new one.