The Pros and Cons of Home Downsizing

The process of home downsizing has become very common in recent years. Many people find themselves moving into smaller houses for the financial benefits that they can reap. However, there are a few drawbacks as well. Here are the pros and cons of home downsizing.

Pros

Downsizing your home can give you a few nice financial benefits. The biggest benefit that you will be able to take advantage of is a smaller mortgage payment. In most cases, your mortgage payment is going to be the largest bill that you have every month. Therefore, if you can find a way to lower this payment, it could provide you with a lot of financial flexibility every month.

In addition to securing a lower mortgage payment, you will also be able to lower your property taxes. Property taxes are determined by your local assessor's office. The assessor will determine your tax rate by how much your house is worth. Therefore, if you end up getting a cheaper house, this will also lower the amount of property tax that you pay. 

By downsizing your home, you will also have less maintenance to worry about. If you have a large home, then you understand how much it takes to upkeep it. By getting a smaller place, you can eliminate a lot of this maintenance and, therefore, the costs associated with it. If you sold your house and moved into a condo, you would not have to worry about paying someone to mow the lawn, repair the roof or repaint the outside of the house. Therefore, this could potentially save you quite a bit of money.

Cons

Although there are some financial benefits to downsizing, there are a few drawbacks to consider also. Most of the time, you will never be able to save as much money as you would like by downsizing. In order to make a substantial difference in the amount that you save on your mortgage payment, you will have to downsize substantially. For example, if you were to purchase a house that was $50,000 cheaper than the one you have, you might be able to save $300 to $400 on your mortgage payment. For some people, this might be enough to justify going through the process of downsizing. However, for many people, this will not be a significant enough difference to justify going through downsizing.

The transaction costs also cause problems for those that are looking to downsize. When you downsize your home, you will first have to sell your existing house. This will involve a substantial real estate agent commission in most cases. You will also have closing costs to consider. When you find another house, you will then have a new set of closing costs to worry about.

If you downsize your house significantly, this could also hurt you when you file your taxes. For example, if you have not lived in your home for more than two years, you will have to pay capital gains tax on anything that you make from the sale. In addition to that, you will be able to deduct less mortgage interest from your taxable income at the end of the year.