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Moving to a Smaller Home Might Save You Money

By: BankingMyWay.com Staff

The heady days of the housing bubble are gone, but it still might make financial sense to downsize your McMansion. In part one of this two-part series, we spelled out the costs you can expect to incur if you trade down to a smaller home. Now let's look at the potential benefits.

The Immediate Profit

The most obvious benefit of trading down is the profit you realize -- the difference between the selling price of your old home and the purchase price of your new home (minus fees and the like, as described in part one). If you take that cash and immediately use it to renovate your new home, you haven't really changed your financial situation. On the other hand, you could invest your profit and accumulate a far larger sum over the long term.

The Annual Savings

Trading down can also save you significant sums each year going forward. Even if those savings aren't dramatic the first year, they can add up over time. Here are some savings you might hope to realize by trading down:

A lower mortgage payment: Depending on how long you lived in your old home, you may have built up enough equity to cover your new home's purchase price. At worst, you'll be able to take out a somewhat smaller loan on the new home. As a result, your monthly mortgage payments may be smaller as well -- although that depends in part on whether your new interest rate is lower or higher than the rate on your old loan.

Reduced maintenance costs: Figure out what you're paying for maintenance on your current home. Chances are you'll save a considerable sum each year if you buy a well-maintained house that is significantly smaller.

Lower utility bills: Water, phone, Internet and cable costs won't change much, but energy costs might decline significantly if you buy a smaller house in a similar (or warmer) climate. How much? That depends largely on the how the two homes are built. A heating contractor can help you estimate your potential savings.

Lower property taxes: Your property taxes might fall if you move to a less expensive home.

Lower insurance premiums: Like property taxes, homeowner's insurance is based largely on the value of the property.

Crunching the Numbers

So, is it worth it for you to trade down? The next step is to compare the potential costs and savings of such a move. Start by considering the net profit, after any taxes, fees and other upfront costs. Then calculate the annual savings you'll realize.

Still not sure what to do? Don't forget that the profit on the sale and any annual savings could be invested to improve your long-term financial prospects. For example, let's say you trade down at age 55 and end up with $100,000 net profit, and you lower your annual housing-related costs by $3,000 a year ($250/month). You decide to put that $100,000 to work in your retirement portfolio. You also deposit the extra $250 in your 401(k) each month.

That money will grow to $268,000 after 10 years, assuming you earn an 8% annual return on your investment. Now let's say that you decide to withdraw 5% of that money each year -- a rate you can probably sustain indefinitely. That boosts your retirement income by $13,400 a year. What's more, you still have lower housing costs than you would have if you'd stayed in the first home.

You may decide that the savings from trading down aren't worth making the move. But by crunching the numbers, you will have eliminated some of the guesswork from your decision. And that should make it easier to live with your choice, whatever it may be.

— For more ways to save, spend, invest and borrow, visit MainStreet.com.

The Immediate Profit

The Annual Savings

Crunching the Numbers

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