Our houses have gotten bigger in the last few decades. Since 1973, the average American house has grown by 1,000 square feet, coming in at over 2,400 square feet. And what’s more, the average family size in the U.S. has gone down. So we’ve got more space for fewer people.
While the bigger is better mentality is sweeping the nation, there are some real financial benefits to downsizing your home. If you’re looking to cut back on your monthly bills and open up some investment opportunities, this may be the right option for you.
It’s not a bad thing to live in a large house. You should always treat your home as an investment – something that will gain you equity, value, and even a potential source of retirement in your golden years. In order for you to make the most out of your home, you should treat it like a long-term investment. In some cases, buying the biggest home you can afford might not be the best bang for your buck.
The key here is living within your means. Before buying a house, it’s best to look at a mortgage calculator and think about your monthly income and expenses. Typically, the larger the house, the larger the mortgage payment, so you’ll have less funds each month to save and invest. Be sure to weigh your options carefully.
Downsizing may leave you with less space, but it will likely translate to a smaller mortgage payment. In a study completed in 2012, the average mortgage payment was found to be $1,061. If you can cut your mortgage payment by 25-30%, you’ll be able to use that excess money for a wide variety of opportunities.
For the upcoming examples, let’s use the following as our starting point: Let’s say you currently have a home loan that’s $222,261 with an interest rate of 4%, meaning your monthly payment (not including taxes and insurance) is $1,061. If you cut back and move to a house where the loan is 25% cheaper, or $166,695.75, your new mortgage payment is $796. You’ve just earned a monthly savings of $265.
Pay Off Debt Faster
The beauty of downsizing is that you’re already used to living off of a specific amount of money every month. When you move to a smaller house with a smaller mortgage, you should be able to put that excess money toward debts and investments.
Student loan debt is growing in the U.S., with the class of 2016 graduating with $37,172 (up 6% from last year).
On a student loan like this, you can expect to pay an average of $266.30 each month (20-year term with 6% interest). Adding that extra $265 from downsizing, though, could change that a lot. You could save $17,913 in interest payments and pay off your loan over 12 years earlier.
Take a look at this calculator to see how much you could be saving.
Whether you’re interested in boosting your 401(k) or jumping into real estate, downsizing could help you achieve your goals. Let’s say you currently invest $500 each month into your 401(k) (not including any employer match), and you expect to receive a 6% return each year. If you work for 40 years, you will have $787,428.92 in your retirement fund. This may seem like a lot, but check out this sobering article on the cost of retirement. If you downsized your home and added an extra $265 to your retirement fund, that savings would skyrocket to $1,309,100.55. The power of investment is in the time, and $265 can make a magnificent impact in the long run.
Dave Ramsey’s website has a handy investment calculator for you to look at your own potential savings.
Is Downsizing Right for You?
Choosing to downsize is a big decision, and you and your family should carefully consider the pros and cons. When it comes down to it, it’s really a matter of priorities. For some people, factors like space and location take precedence over paying off a loan a few years earlier. And that’s fine. But if you’re trying to figure out how turn your financial goals into a reality, downsizing may be a good means of getting you there.
If you’re ready to downsize and start the house hunt, let one of our Home Loan Experts help!
Have you downsized? Share any tips in the comments!
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