Some people can see themselves wanting to purchase a home by the sea, or in a secluded cabin far away from the hustle and bustle of life. Even if you have remodel goals, once the kids have left for college or the time is right, downsizing your home makes a lot of sense. You can take that opportunity to turn your dreams into a reality – whether that means moving to a new state or across town. Downsizing has a lot of advantages that can free extra money from a smaller mortgage and less overhead expenses.
Imagine being blocks away from shops, restaurants, and maybe even the beach. You could downsize and never look back. The move to a smaller home is a major life and financial change that most parents should consider after the kids are on their own. Let’s take a look at the benefits of Downsizing from a Real Estate Finance view.
A New Way of Life
Downsizing from a big home gives you a chance to choose where and what kind of life you want to live and when your current working career is over. Do you want to move near the children? Or get away from those snowy winters in Wisconsin? Or do you want to live near a vibrant downtown area filled with all sorts of attractions?
The very first thing you should do is take a look at your housing situation. Those that are parents will have fond memories of their kids childhood home and it makes sense to consider a move to a less expensive location that fits your needs during this transition in your life.
Ask yourself Do we need a house this size? Is this the area we would like to spend our retirement years in? Do we want to move to a retirement community? Do we downsize to use the extra cash to fund our retirement?
There was a survey in late 2016 from the American Association of Retired Persons (yes there is a association named this) that found nearly 1 in 5, or 17% of soon to be empty nesters said they planned to downsize their home. 11% expected to move to a new town or city and 10% said they would move to a new home.
Increased Cash Flow
If you’re going to spend less on a mortgage payment, you are likely to have money leftover every month to allocate for other uses. Or you could pay cash for a smaller home from the proceeds of your existing home. And maybe you can pay off that equity line of credit you used to remodel the kitchen.
Ability to Pay Down Debt
Those who have raised kids in a home they have owned for a decade or more are more than likely to walk away with the profit from the sale of the house. If the cash gained is big enough, it can be used to pay down any outstanding debt you may have and even fund a down payment on a new home. Some people use this influx of cash to pay down credit card debt or auto loans. By this time in your life, anything you can do to put yourself into a position to pay off or reduce debt is a plus.
Lower Utility Bills
It costs a lot less to heat/air condition a smaller home than larger. Typically, there is no wasted space such as vaults in a smaller home. Less square footage decreases the amount of energy expended. Reducing energy is better for the environment and helps to keep your home green.
If there is no place to put it, you’re much less likely to buy it. That means less money is spent on clothing, food, and consumer goods.
Minimized Stress. Less responsibility, smaller workload, increased cash flow and greater flexibility — added together, they all reduce stress. Homeowners who have successfully downsized sometimes appear happier when they’re no longer overwhelmed by the demands of a larger home.
The financial edge to downsizing, whether it’s a hot, cold or neutral market, makes little difference overall. But one could argue that downsizing in a seller’s market would give the homeowner more cash on hand after closing. However, the trade-off could be a higher sales price for the smaller home.
For example, say in a neutral market that an existing home is worth $500,000, encumbered by a $200,000 mortgage. Not counting closing costs, which may include commission and title fees, the net proceeds would be $300,000. Let’s also assume that a seller could buy a smaller home for cash at $250,000, putting $50,000 in the pocket.
If it’s a seller’s market, however, and prices have jumped 10%, for example, the existing $500K home might be worth $555,000. Meaning the smaller $250K home could be purchased at $278,000 in cash, resulting in $77,000 cash remaining.
If it’s a buyer’s market, say, and prices have fallen 10%, then the existing home could be worth $450,000. The smaller $250K home would be priced at $225,000, resulting in $25,000 cash to put in the bank.
The best of both worlds would be to sell in a seller’s market and buy elsewhere in a buyer’s market. Either way, a seller could end up owning a free-and-clear smaller home, so take your pick of markets. Realize, though, that you can’t really time the market.
Should you buy or purchase first?
Sellers often ask whether they need two agents to buy and sell. First, consider similar comparable sales and your home pricing. Is it easy to comp? Second, is it located in a neighborhood where out-of-area agents are shunned by local agents? It’s not supposed to happen, yet it does. But if your home is easy to price, and the agent has contacts in that area, it doesn’t really matter where the agent is located. Sometimes agents will negotiate the commission if they are handling two transactions.
Should you sell first and then buy, or buy first and then sell? Generally, it’s better to sell your existing home before buying a new home. The reason is it keeps your emotions in check. But some markets will dictate that it’s better to buy before you sell. Discuss this strategy with your real estate agent.
If you are a current empty nester, now is the time to change your way of living. Figure out what it is you want to do during this next stage of your life which will define you into your retirement years. Thinking of taking that step? Call or email one of our Real Estate Advisors to discuss selling your current home and buying a new one in your desired community. Even if it is out of state, our network can help you find an agent that can locate your potential new home.