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June 20, 2022

Downsizing Your Home: The Pros and Cons

Should We Downsize Our Home? + How Our Debt Freedom Helped us Avoid Divorce

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Have you considered a change of pace when it comes to the size of your home? Do you think you could make the change to something… less?

Recently, podcast listener Samantha asked about the pros and cons of downsizing their home.

Here are the quick details of her situation:

  • Bought a home in North Carolina 3 years ago for $400,000
  • The property is now worth $700,000
  • To stay in her current house, she'd want to spend $100,000 on repairs and updates
  • Wants to know if using home equity is a smart move to achieve other financial goals like investing

Here are a few pros and cons to downsizing your home.

Pro #1: Less Housework

As a homeowner, housework fills many hours of my day and week. Cleaning, vacuuming, yard work, raking, weeding, bagging lawn stuff, etc.

Now, there’s no dodging this housework when you downsize, but there may be a lot less of it. 

Recently, my parents downsized from a 3,200-square-foot house to a 1,300-square-foot house. The yard work and housework have gone down significantly for them. 

They spend less time keeping the house and landscaping tidy, and more time relaxing, exercising, volunteering, and spending time with their family.

Con #1: Less Space

Now, this really could be a pro or a con depending on what your goals are … but one thing my parents mentioned is that they would prefer a little more space for hosting at the house. 

So that begs the question, how much square footage is the right amount for a family of 3?

The range I’ve found is anywhere from 500-700 square feet per person

So depending on your lifestyle and needs, and the fact that your husband works from home, you may want to find a house in the 1,500-2,100 square foot range. 

If another child is in your future and you become a family of 4, consider something in the 2,000-2,800 range. 

Knowing that the top range is not too far away from your current square footage, perhaps the lower side makes more sense for you. 

We have a family of 4 and our house is around 2,700 square feet. It feels like the right size for us right now. 

Let’s recap the home square footage suggested per person:

  • Family of 2:  1,000 – 1,400 sq ft
  • Family of 3:  1,500 – 2,100 sq ft
  • Family of 4:  2,000 – 2,800 sq ft
  • Family of 5:  2,500 – 3,500 sq ft
  • Family of 6:  3,000 – 4,200 sq ft

The interesting thing about homeownership, just like personal finance is that it’s all personal. So these square feet ranges are well and good, but if it doesn’t fit your situation, then forget these numbers. 

Pro #2: Access to Equity

Getting access to hundreds of thousands of dollars is a huge upside to downsizing your home.

You can use this extra money for so many things:

  • Investing for the future
  • Paying off debt
  • Giving back 
  • Going on family vacations
  • Or even making your new house more comfortable

These options can be so plentiful that I’d recommend taking the time to sit down and specifically write down what you’d want to do with the money. And then ask your partner to do the same thing. 

While this potential windfall might feel like a blessing, if you two aren’t on the same page, then it could cause some unintentional marital fights. 

Related Content: Life After The Mortgage is Paid Off

Con #2: Selling a House is Expensive

While on the surface, the quick math problem looks like the sale price ($700,000) minus the current home mortgage principal ($300,000) would net you $400,000. 

Unfortunately, that won’t be the final amount you’ll walk away with. 

You’ll want to crunch the numbers on some important costs that go along with selling your house like:

  • Real estate commissions (up to 6% of the sale price of your home) = $42,000
  • Title Insurance (Typically a percentage of the purchase price, in this case, we’ll use 1 percent) = $7,000
  • Repairs to your house to get it to sell = (this all depends on how much work is needed, but even you said $100k to get it in a good spot for you to want to live there)
  • Escrow Fee
  • Property Taxes
  • Moving Costs
  • Attorney fees
  • Transfer Taxes
  • Home staging
  • Seller concessions
  • Pre-listing home inspection
  • And the list unfortunately goes on …

So at the end of the day, consider that potentially $100,000 or more of this $400,000 might go away with just the general costs of selling a home. 

Pro #3: Owning a Smaller Home is Less Expensive

While I’ve almost talked myself out of this downsizing idea because of the costs to sell the thing, it’s important to note one of your original complaints.

It’s expensive to maintain this larger 3,000-square-foot home!

When you own a smaller home, you’ll potentially have fewer things to fix, fewer upgrades to make and fewer costs to incur. This all depends on the home you would downsize to, but the goal is with a smaller home you'll get smaller problems. 

To put some math around this idea, a general rule of thumb is to save up 1%-4% of the value of your home each year for home maintenance

For that $700,000 home, that’s $7,000-$28,000 per year. A few years of not updating your home (just like our family) will make that number creep up to $100,000 fast! 

Let’s say you found a $300,000-$400,000 home that you were able to buy outright with no mortgage (ahem, my mortgage-free side is showing), then you’d be looking at $3,000-$16,000 per year instead. 

That sounds a lot more comfortable. 

Con #3: You Have to Buy Another Home 

Okay, let’s say you decide to sell your house and you get a few hundred thousand dollars back.  That sounds awesome.  

Now, it’s time for the next step. Where are you going to live now?

That can be an exciting decision. It can also be a stressful one. 

In my 18 years as a homeowner, this feels like the craziest time I’ve ever seen to buy a home. That’s just my outsider-looking in opinion, but I’ve got real estate agent friends discussing the crazy bidding wars, offers of $100,000 over asking and people “settling” for a home they maybe aren’t thrilled with because they just needed somewhere to live. 

If you decide to leave North Carolina altogether and find somewhere quieter and less competitive, that’s probably a different story. But if you decide to stay in the ultra-competitive market that increased your home price by $300,000 in just 3 years, then be ready for an ultra-competitive home purchase on the other side. 

To add more pain to the process, mortgage rates are now at their highest rates in 14 years!

Final Thoughts on Downsizing Your Home Pros and Cons

After weighing these pros and cons, if it were me, I wouldn’t sell my home right now JUST for the equity it could bring my family. If those reasons stretch outside of money, then I might consider it. 

So is the juice worth the squeeze? There’s gonna be a lot of squeezing to get that juice. And once you have that juice, are you happier because of it?

This isn’t an easy decision. Luckily, you don’t have to make it alone Samantha!

Good luck to you and your husband and whatever you do, do it together and support each other along the way. 

Are you considering selling your home in this market to tap your equity? What do you think are the pros and cons of downsizing your home?

Please let me know in the comments below.

Andy Hill

Andy Hill, AFC® is the award-winning family finance coach behind Marriage Kids and Money - a platform dedicated to helping families build wealth and happiness. With millions of podcast downloads and video views, Andy’s message of family financial empowerment has resonated with listeners, readers and viewers across the world. When he's not "talking money", Andy enjoys being a Soccer Dad, singing karaoke with his wife and relaxing on his hammock.

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