Should I Downsize My House?
As my MBA classes draw to an end this Spring, our family has one big choice to make. I’ve been in my current job more than three years, and one potential on the table is to move within my company to just about anywhere in the US. We don’t necessarily have to move, but it seems like it would be great for my long term career.
One additional bonus of moving is that we’d have the opportunity to downsize our house and save a bunch of money! Read on below to see just how much you could save – I ask the question “should I downsize my house?”
Should I Downsize My House? – Money Saving Breakdown
- Difficulty (Super Easy/Easy/Medium/Hard/Expert): Hard
- Average Savings per Year ($/year): 7,000
- Time Required (mins): 4800
- Savings for your time ($/hr): 88
Should I Downsize My House? – Why Get Smaller?
What are some of the main benefits if you downsize your house? There are a ton – here are a couple that I’ve considered in this analysis:
- Interest -The biggest savings I’ll encounter when I downsize my house is the interest that I would normally pay on my mortgage. For us, it looks like we’d save more than $200 a month! Yeah, yeah, this will mean you can deduct less on your taxes, but you’ll still come out way ahead in the end 🙂
- Upkeep – This is one that’s kinda a wildcard that most people don’t think about. Bigger houses generally have more things that can go wrong, and when they do go wrong, it will usually cost you more. A good rule of thumb is that you should figure to spend/allocate 2% – 3% of the value of the house annually for upkeep. For us, it seems like we’d save >$2,000 a year by downsizing my house.
- Taxes – Generally, the bigger the house, the more expensive. It follows that the more expensive the house, the more you’ll pay in taxes each month. If I downsize my home, we could save more than $70 a month here!
- Heating and Cooling – This is another obvious benefit when you downsize your house. In my analysis below, I assumed a linear relationship between the square footage of the home and the heating/cooling costs. While this isn’t entirely accurate, it’s pretty good for estimation purposes. On the average, I figure we can save another $70 on utilities a month if I downsize my house.
- Home Insurance – This is a smaller factor – I figure downsizing our house will save about $20 a month.
- Lost investment opportunity of Principal payment – The other small difference is all that the extra money you’re putting down as principal with the bigger home you could be putting into investments and gaining interest. For us, this is pretty small at about $20 a month.
Should I Downsize My House? – Case Study
The example below pretty closely illustrates the change my wife and I are looking to make. A couple of years ago, we upgraded to a house that is way bigger than what we need. It seemed like a good idea at the time, we’d saved diligently and had extra money. In hindsight, I kinda wished we would have invested the money in the stock market (market index funds) vs. a bigger home.
As a result of moving into a bigger home, we’ve been paying an extra ~$7,000 a year for the choice. If we can make the jump to downsize our house to a 2,000 square foot house (or smaller if I can sell my wife on the idea 🙂 ), we’ll save about ~$150K over the course of the next 15 years (assuming an 8% return on the savings)! That’s enough to send one of our kids to college all expenses paid!!!
| Annual Costs | |||
| 3,600 sqft | 2,000 sqft | Monthly Difference | |
| Assumed Purchase Price | $360,000 | $250,000 | |
| Principal (counted as savings) | $15,925 | $11,059 | – |
| Interest | $8,359 | $5,805 | $213 |
| Upkeep | $7,200 | $5,000 | $183 |
| Taxes | $2,807 | $1,950 | $71 |
| Heat | $1,080 | $600 | $40 |
| Cooling | $900 | $500 | $33 |
| Lost Interest @ 8% | $389 | – | $32 |
| Insurance | $786 | $546 | $20 |
| TOTAL = | $20,736 | $13,855 | $573 |
| Total Annual Difference = | $6,881 | – | |
Should I Downsize My House? – Final Thoughts
As you can see, there are many monetary benefits for me if I decide to downsize my house. The same sort of savings would apply to just about anyone. For me, if I make the change to downsize my house, I’ll save $150,000 over the next 15 years. If circumstances work out, the savings from this change will be enough to fully fund one of our kids college educations! Wow!!
What are your thoughts? Have you ever asked yourself the question: “should I downsize my house?” Even though this can be a huge, life-altering decision, this is about the biggest way to save money I’ve found so far!
Downsizing definitely saves you money, but there are a lot of other factors to take into account as well that you didn’t mention. Will you find a smaller home that you like as much as your current one? How’s the neighborhood? What will your neighbors be like? What is the age of the new house vs the old one (ie, are you about to have a $5000 furnace/AC combo fail?). It’s a tough decision…..and in the end the answer may be different for different people. I could save money by downsizing, but I love my home and my neighborhood and wouldn’t do it.
Brock @cleverdude recently posted…The Frustrating Tale Of a Teenager And His Cell Phone
Brock,
Excellent points that you raise. We love the neighborhood we are in and we have nice neighbors. Sure, adjusting to a smaller home would be difficult at first, but I think we’d be fine with it in the long run.
I really got to thinking more about the whole thing when we used a friends apartment in New York for a couple of days. It was a one bedroom, one bath apartment that was basically three rooms (kitchen/table, bathroom, and bedroom/TV area). It was probably 700 sqft total. We got along just fine. It really made me realize that having extra space is definitely a need vs a want.
It’s basically the same argument as purchasing a new BMW vs a used Corolla. Both will get you where you’re going, but one is much fancier, and pricier 🙂 I think you’re exactly right on the money though, we’d have to find a nice and safe neighborhood with good schools if we were going to make the transition.
My husband and I both prefer small homes, so I’m biased. I find it easier to clean and find things. Besides the extra cost of heating/cooling, there’s also the extra furniture and home decor items you’re likely to accumulate with a bigger home.
Deia @ Nomad Wallet recently posted…Practical Tips for Road-Tripping With Dogs
Deia,
Thanks for commenting! I think you’re 100% right on the money 🙂 I really don’t know what we were thinking when we got such a large house. I guess we were semi-brainwashed at the time or something…
Downsize! It’s just a house and if you can do it at the same time as making a move to another city anyways, go for it! The cost savings and cleaning and maintenance work are prime motivators.
I find our home too large and would like to downsize but can’t convince my husband to do this. The problem is we are not mortgage free yet and would like to do some renovations before we sell. At least my husband (who works in the industry) strongly believes we should do this. We’ve agreed to go one year at a time and reevaluate.
debt debs recently posted…Top Ten List – What I Don’t Like About My Investments
Debs,
I agree with you 100%. My wife and I are both on the same page that we’re going to downsize when we next move. If I relocate with my work, this could be before the year is out. We plan to try and reduce our square footage by almost 50%! We should experience all the benefits you mentioned as well as saving a boat load of $$$!
If you know you want to sell, it seems like putting money into renovations would be hard to get a ROI. Besides installing a new bathroom, I thought most types of renovations were break even at best?!?