MoneyWi$e: Downsize Your House & Your Debt…?
Posted on May 1, 2012 by bob in MoneyWise
People downsize their homes for a variety of reasons, not all of which are related to cutting their living expenses. But whether saving money is a primary or secondary reason for moving into a smaller residence, it is best to make sure that your expectations are based on facts. Not all smaller spaces will truly save you money. If you are thinking about downsizing to reduce expenses, here are some considerations to keep in mind.
1) What will it cost you to transition from your current home to a new place? If you own your home, can you sell it now for a reasonable price after the real estate commission? Will the market improve if you wait to sell, or will it get worse? What will your chosen smaller space cost you to buy? Will you be able to buy a new place for cash or will you need to carry a mortgage? Would you be satisfied renting instead of buying? What will it cost you to move to a new location? Will the lower cost of a new place justify the moving cost? These are all questions with financial implications that you need to answer realistically.
2) How will the ongoing costs of your new residence compare with what you are paying now? Clearly you need to consider utilities, property taxes, and insurance. In addition, will you need to store surplus household items, temporarily or long-term? What will maintenance and repair, yard work, pest control, security services, etc. run you in the new location vs. what you have paid in the past? Will you face a difference in homeowner association dues, condominium fees, etc.?
3) Are there other costs, not directly related to housing, that could reduce or enhance the benefits of a change? Is the new location closer or more convenient to places you go—work, family, friends, church, shopping, the gym, medical care, etc? Is public transportation more readily available at the new location?
The important point with all such costs is to make sure that you are using realistic assumptions in preparing your analysis. You will be better served by determining the actual recent utility charges for the location, if they are available, than just assuming a certain savings based on a difference in square feet between your current and proposed housing. Are you (and your spouse) actually willing to get rid of enough “stuff” to fit into a smaller space, or will you wind up paying as much for storage as the monthly difference in other costs? Is your expected selling price for your home a pipe dream or have you verified it with a knowledgeable realtor or appraiser? How much less will you really pay for that sparkling new garden home than you get for your older single family ranch?
One potential benefit of a bona fide move into smaller, less pricey quarters is the possibility of getting completely out of debt. If you find a suitable and smaller place that will not require you to carry a mortgage, your closing costs for the purchase will typically be a good bit less than if you have to borrow to buy.
If you have mortgage payments now and can get into a smaller home with no mortgage, you will automatically experience an increased degree of financial flexibility and freedom. That means that you can either use the extra monthly cash flow to do other things or that you can forego that much income without your lifestyle suffering.
Either way you are likely to feel pretty good about your new situation, assuming that the arrangement meets your needs in other respects.
One possible downside is that you may not have enough space for overnight visits by all of your children and other relatives, but then, that may have its upside as well.
Alan Wallace, CFA,ChFC, CLU
Alan Wallace, CFA, ChFC, CLU is a Senior Financial Advisor for Ronald Blue & Co.’s Montgomery office, 334-270-5960, alan.wallace@ronblue.com.
