Is It Time to Trade Down on Your Home?
By: Jeff Brown

Will your castle make you secure in your sunset years?

For many homeowners that’s the plan. Sell the big house after the kids are gone, “downsize” to a cheaper one and live on the extra cash. But that has become harder to do.

Homes just aren’t fetching as much as they did a few years ago, thanks to the burst housing bubble. That means the math isn’t working out for some people, while others may be holding out for higher prices. Many people are postponing retirement, delaying a downsizing that would involve a major relocation.

Of course, this may be a good time to buy a smaller home, as their prices have fallen as well, but many people are leery of making big financial moves when the economy is shaky.

Two groups should take a new look at their downsizing plans in light of today’s conditions: those in or near retirement; and everyone else.

Those preparing to downsize soon should study the entire cost of the move, not just compare the prices of the old and new homes.

You’re likely to pay a 6% real estate agent’s commission on the sale and incur various repair and legal costs. Legal fees, appraisal, title insurance, inspection and other costs can add thousands to the cost of purchasing the new home, even if you pay cash.

And then there is the moving company, costs of retitling vehicles if you change states, travel costs during the house hunt and many other incidentals. A new home often needs painting, new furniture and landscaping to make it just right.

If the downsizing still leaves you with substantial cash in your pocket, it may well make sense, especially if moving will take you to a better location or provide other benefits.

But if the motive is purely financial and doesn’t free up much cash, it might make more sense to stay in the bigger home a bit longer.

Experts generally say home equity should be the last source of income to be tapped in retirement, after Social Security, taxable savings and retirement accounts no longer provide enough.

One way to tap that equity is through a reverse mortgage, a loan that is not paid back until the home is sold, no matter how long you live. The older you are, the more you can borrow, since the lender is more likely to get paid back sooner. Beware of high fees. AARP has information on its site.

For younger people, the uncertain future of the downsizing option is good reason to avoid buying too much home in the first place. Granted, everyone wants enough room for the family, but there’s a big difference between a three-bedroom home and a three-bedroom McMansion.

As a rule of thumb, think about whether every room in the house will be used every day. If the family room and kitchen will be the center of activity, maybe you don’t need to pay for a formal dining room and living room used only on holidays.

From a purely financial perspective, a cheaper home probably makes sense. The cost savings can be invested in a portfolio of stocks and bonds, which is likely to provide bigger investment returns than the home, especially when mortgage interest, maintenance, insurance and taxes are considered.

Those investments will be accessible at anytime, while money tied up in an expensive home is hard to get at. Buy a more modest home and you may not need to downsize to fund your retirement. You’d still be free to move in your later years, of course, but only because you want to.

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

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