When Down-Sizing Your Home Makes Sense

Q: I always thought that when we bought our ideal home, we’d live in it until we died. It seems to me that most people will eventually get their home paid off so they can live in it mortgage-free when they retire. My husband and I both work full-time and really appreciate our home.

But lately, I’ve heard some of the financial experts on television talking about down-sizing your home. I can’t believe I’d ever consider it. But ever since the bottom fell out of the economy, I’m starting to wonder about all the costs involved — should my husband and I think about selling our house?

Does giving up the home of your dreams and down-sizing ever make sense?

A: You pose a good question. Many people believe like you: that they’ll remain all their lives in the first home they buy. However, we know that usually isn’t the case as the average adult moves nearly 12 times in his life, according to the research. And usually, each time people move they “move up” to homes that are bigger and cost more to buy and maintain.

The reality is that it costs money to keep a home in good working order. Some situations in life could occur that would compel you to reduce your standard of living. If you or your spouse got laid off, for example, it would require you to live on just one of your salaries.

So the question is would that be do-able? If the layoff lasted longer than you were prepared for, there might come a day when the topic of down-sizing and selling your house to reduce living expenses would be discussed.

Another reason to down-size has to do with how much money you save over the long haul. If you turn 65 and your retirement savings haven’t reached an amount you can live on for 25+ years, it makes sense to reduce your standard of living. That will most likely involve down-sizing and selling the home you live in for a smaller one.

Let’s say you live in a 2,500 square foot home at age 65. If the kids have moved out, you could reduce your monthly expenses by a large percentage if you moved to a 1,200 square foot condo. That’s because you’d be paying for heating, cooling and upkeep on just ½ the square footage that you did before – plus, no lawn care required!

Another factor that could trigger down-sizing is one of you leaving the workforce early. Consider this — if you or your husband develops a chronic health condition that prevents you from working, you’d be living on one paycheck or on a significantly lower Social Security income rather than the amount on your paycheck.

Another situation that might cause one of you to resign your job earlier than you anticipate is the need to take care of an aging parent.

The good news is that it’s less expensive to run a smaller home. You’ll begin noticing savings right away. The smaller your yard is, the less you pay to mow it or have it mowed. The smaller your roof is, the fewer dollars you spend re-roofing it.

So there are specific reasons that might trigger thoughts of selling your home and down-sizing. Be open-minded when reviewing any changes in your financial situation and be flexible enough to make the necessary changes.

If an unexpected financial situation arises, always consider all your alternatives.

Paying Cash For A Home

Have you ever considered paying cash for your next home? While paying for a home outright may seem like an insurmountable hurdle, it is an attainable goal if you’re willing to put in the time and effort to do so.

You may not be able to purchase the sprawling Tudor you’ve had your eye on for years, but purchasing a ranch style home that needs some TLC or a modular home on a nice lot may fit easily within your range. Once you purchase your home outright, you can fix it up and sell it for a profit, or make the necessary upgrades to turn the house into a home.

Paying cash for a home can save you literally tens of thousands of dollars over the next 10-30 years in interest. Clearly, purchasing a home outright can be beneficial, but is it right for you?

Consider these benefits of purchasing a home outright, rather than financing the purchase through a lender:

1. No mortgage payments. You won’t ever have to make a mortgage payment again! Once you purchase your home, the only expenses incurred are maintenance, home insurance, property taxes, and possibly homeowners’ association dues.

  • Considering that the average monthly payment on a home loan will fall in the range of $1,000 and $2,500 per month, you’ll be able to pocket this amount on a monthly basis.

2. Full profit. If you decide to sell the home, you’ll walk away with a profit due to the equity you build through appreciation and upgrades.

  • When you sell a financed home, you’ll have to pay the bank first. And because the first years of your mortgage payments are designated almost solely to paying interest rather than principal, you’ll be lucky to walk away with even a small profit.

3. Financial freedom. After a few years of nixing a high mortgage payment from your budget, doors which otherwise wouldn’t be open to you are suddenly viable options.

  • You can take a weekend trip to Tahiti on a whim, purchase a new car outright, enable your spouse to stay home with the children on a fulltime basis, and pay for your children’s private schooling without having to pinch pennies.
  • Alternatively, you can continue living frugally in order to retire earlier than expected. After all, you’ll be able to fully invest in your retirement if your monthly expenses are minimal for the next 20 years.

Saving for the Purchase

If you have two incomes coming into the household, you can turn this dream into a reality by learning how to live on just one income. When you do, you’ll be able to set aside one salary strictly for this goal! In order to make this happen, you’ll likely need to trim down your monthly expenses to the bare necessities.

In order to completely eliminate the expense of rent and utilities, you may want to look into the option of moving in with a relative for a few years. Often times, parents are more than willing to welcome you into their homes for a few years, since it allows them to spend more time with you while you achieve a worthwhile goal.

If moving your family into grandma and grandpa’s house isn’t your cup of tea, follow the tips below to help you slim down your expenses and ramp up your savings!

  • Move into a smaller home
  • Rent out one or two bedrooms in your home to a responsible college student or young professional
  • Move to a less expensive part of town where rents are heavily discounted
  • Halve your grocery bill by using coupons
  • Sell your car – use half of the proceeds to purchase an older vehicle outright and apply the other half towards savings
  • Save your tax refund
  • Choose to send your children to public school rather than private
  • Get a second job
  • Eliminate cable television and internet from your monthly expenses
  • Trade your monthly cell phone bill for a prepaid phone
  • Shop at thrift stores for clothing rather than retail stores
  • Sell high-value collectibles
  • Apply your yearly vacation fund towards your savings and visit tourist attractions in your own area
  • When you near your goal, sell the home you currently own to make up the difference in price

While implementing the ideas mentioned above may be a tough pill to swallow, it’ll be worth it in the end. Once you achieve your savings goal, you can purchase a home outright and wave goodbye to high interest loans or empty rental payments.