Want to Lower Your Housing Costs? Downsizing Isn't Always the Answer
Here's why a smaller home may not save you as much money as you'd think.
Maybe you took on too much house and are regretting that decision. Or maybe you've lost income during the coronavirus pandemic, and are having trouble keeping up with your mortgage. No matter your situation, housing is probably one of your largest monthly expenses, maybe the largest, so lowering it could work wonders for your budget. But before you rush to downsize to a smaller home, recognize that doing so may not be the solution you're looking for.
A smaller home won't always result in savings
Moving from a 3,400-square-foot home to a 1,700-square-foot home with comparable features in the same neighborhood will probably save you some money. But slashing the size of your home by relocating to another city or neighborhood may or may not do the trick.
While smaller homes are often cheaper than larger ones, whether downsizing actually saves you money hinges on the specifics of your current and future homes. If, for example, you're living in an older home, and you downsize to a smaller place with updated bathrooms, a high-end kitchen, and other upgrades, you may find that you pay virtually the same amount of money for that property, even though it's less spacious.
Furthermore, home values can vary tremendously by neighborhood. A smaller home in a top-rated school district, for example, may command a higher sale price than a larger home in a district with lower ratings.
Another thing to consider is that different cities have different property tax rates. If you move from an area with a low tax rate to an area where taxes are much higher, your property taxes could stay the same, or even go up, despite your inhabiting a smaller space.
Finally, if you downsize to a much older home, you could eat up the difference with insurance costs, maintenance, and repairs. Homeowners insurance companies tend to offer lower premiums for homes with a lot of safety features. If a smaller home doesn't have the same features as a larger one, it could cost more to insure. Similarly, older homes tend to require more upkeep and are more likely to need extensive -- and expensive -- repairs. Pay attention to the age and state of any home you're looking to buy, because despite shedding square footage, you could end up spending more.
Is downsizing the right choice for you?
Retirees are often advised to downsize to lower their housing costs and conserve funds. And since many seniors no longer have children living at home and don't need so much space, that's generally good advice.
On the other hand, if you're a family with children and could still use the extra space, downsizing could make your life a lot less comfortable -- and while it may save you money, that's not guaranteed. So if you want a larger home, it could pay to explore ways to stay in one while making it more affordable.
One such option is to refinance your mortgage. If you snag a lower interest rate on your home loan, it could shrink your monthly payments substantially, saving you money.
Another option is to consider renting out a portion of your home, like a finished basement. Different cities have different zoning laws, so you need to do some research to see if this is possible. But if it is, rental income could help offset your housing costs, while allowing you to retain a larger space for your family.
Finally, do what you can to make your peripheral costs less burdensome. Perform maintenance yourself instead of hiring people to do it; be mindful of ways to cut your utility costs (even turning off lights more frequently and taking shorter showers really can help); and stay on top of upkeep so minor issues don't escalate into costly repairs.
Downsizing could be a true money-saver, but that's not a given. You may want to explore other options before moving to a smaller place.
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