Should You Downsize?

Is downsizing to a smaller home the right choice for you? According to a Harris Poll survey for Trulia, 64.2% of baby boomers (except those already living in homes under 800 square feet) would consider downsizing if they moved within the next year. But is it financially wise, or would staying in your current home make more sense? Consider these pros and cons to help guide your decision. 

Pros of Downsizing 

For many, downsizing may offer financial relief, especially during retirement. Pete Lang, founder of Lang Capital, suggests that home ownership in retirement should be viewed more as a living expense rather than an investment. Downsizing can be an effective strategy, particularly if your income no longer supports maintaining a larger home. 

A study from Boston College’s Center for Retirement Research indicates that downsizing from a $250,000 home to a $150,000 home could save you up to $6,250 annually – around $520 per month – greatly reducing your living expenses in retirement. 

However, before making the move, it's important to do the math. U.S. News & World Report contributor Abby Hayes recommends calculating your current homeownership costs alongside the expenses for a smaller residence. Don’t forget to factor in the cost of moving and realtor fees. 

Cons of Downsizing 

While downsizing can lead to savings, there are trade-offs. One of the biggest downsides is having less space for visiting friends and family. According to a joint Merrill Lynch and Age Wave survey, 49% of pre-retirees chose not to downsize, and 30% of retirees opted for larger homes. 

Another factor is whether you currently live in an affordable region, like the Midwest, where taxes, insurance, and home prices are lower. In such areas, downsizing may not save as much as expected. 

A major consideration is the potential loss of financial or medical benefits. If the profit from selling your home moves you into a higher income bracket, you may lose eligibility for certain benefits, like Veteran Affairs. Additionally, as Consumer Reports notes, if your profit exceeds $500,000 (for couples or unmarried widows/widowers), you may have to pay federal capital gains tax. 

Weighing Your Options 

Downsizing could be a great way to save money, but it’s crucial to evaluate your personal circumstances. Will a smaller home’s ownership costs truly be lower than your current home’s? If downsizing doesn’t seem like the right fit, Hayes suggests considering alternative ways to save, such as renting out part of your home. 

Here to Help 

If you decide to downsize, consider Five Star Bank for your next mortgage. Explore our options and get in touch with a mortgage expert today.

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