Three years ago our family of 5 decided that moving into a smaller house to pay off debtand start to save money. For us, it was the right thing to do. Our marriage was suffering and we were sick and tired of living the paycheck to paycheck life. Truth be told, downsizing to a smaller house might not be the right answer for everyone. So how do you know if it’s right for you and what can you do to get started?
Mortgage = 25% of your income
A crazy thing happens every day and no one is talking about it. People apply for a mortgage loan and they get approved for a price way above what they should be paying.
On top of that, many young couples get swept away by the fun of house shopping and tend to work their way up to the higher end of their loan amount.
What people don’t tell you is that your mortgage should be around 25% of your take-home pay. That means:
If you find yourself paying more than 25% of your take-home pay toward your monthly mortgage payment, it is definitely a sign that you should consider moving into a smaller house to save money.
Before putting your house on the market, it’s important that you take into account what your potential profit might be. Zillow is a great option when you are looking to get an estimate for what your house might be worth.
Just type in your address and you’ll see the full purchase history and a list of local houses that have sold recently near you. Zillow uses this information to give you an estimate of your home’s value.
Keep in mind that if you have made updates or additions to your home, there is a chance that its value has gone up more than Zillow knows.
Because you will want to have a significant down payment (20% is recommended) when moving into a smaller home, it’s important that you make sure selling your house will be profitable enough to benefit you.
Keep in mind that besides a 20% down payment, you’ll be paying a realtor around 3% plus closing costs.
Don’t forget to take into account the moving costs, an appraisal on the new house and any updates or purchases you’ll need to make.
What if selling won’t turn a profit?
If selling your home will not give you a significant enough payout to help you purchase a smaller home to pay off debt, there are other options to consider.
Renting or hosting your home
You know your home is too expensive, and that reducing the mortgage cost could significantly help you pay off debt, but selling it won’t get you anywhere. If that’s the case, many families will move in with family for a year while renting their home.
If you don’t have family to live with, you could always consider trying a home-hosting site like Airbnb that allows you to host your entire home or even just a room. To see how much people are charging in your area, check out the Airbnb calculator.
How much house can you afford?
Once you’ve figured out your profit potential and whether or not selling your house is a wise choice, it’s time to start looking at how big of a mortgage you can afford.
Using a mortgage calculator is one of the best ways to get a visual idea of how much house you can/want to afford.
Try to keep your debt to income ratio at 25% or lower
Even at 25% our family’s suggested monthly payment is $700 more expensive than our current mortgage. Remember, you want a smaller home to pay off debt. The cost of your monthly mortgage payment will have a direct effect on how much debt you are able to pay off.
To cut back on the costs of your mortgage while still potentially getting a slightly larger home, looking into potential foreclosures is always a good option.
Browsing foreclosures near you can help you cut back costs and offers you the opportunity to make improvements and potentially sell the home in a few years at a large profit.
Pay off debt
Any profits you make beyond 20% would be wise to use in helping to pay off your other debts. From there, I recommend following Dave Ramsey’s 7 Baby Steps to help with debt payoff, saving money and building wealth.
Don’t let the prep work overwhelm you. I promise downing to a smaller home to pay off debt is possible. After just 3 years my family and I were able to completely knock out our debt and finally begin living the life we have always dreamed about.
I'd never advise someone to sell the place they love and move down in house if their payment is reasonable. In these situations there are usually other areas where you can cut back, keep your home, and still get out of debt in a reasonable amount of time.
The smaller the balance, the quicker you can make it happen. Once you make a dent in what you are paying on a mortgage, you can think about diminishing other debts, like student loan payments and medical bills. According to Chris Hogan, downsizing will help you permanently kick debt to the curb.
If you're unable to pay all the bills included in your monthly budget, you know you're in too deep. Further, if you can't imagine a way to come up with the extra funds needed, selling your house could make sense. Before selling, though, make sure you have someplace else to live.
Downsizing your home means that you trade your present house for a smaller or less-expensive one. For instance, you might switch over to a condo or townhouse, or you could move to a home similar to yours in a more affordable area of town.
Step 1: List your debts from smallest to largest regardless of interest rate. Step 2: Make minimum payments on all your debts except the smallest. Step 3: Pay as much as possible on your smallest debt. Step 4: Repeat until each debt is paid in full.
In fact, according to Public Policy Institute of California, 58 percent of California's equity millionaires, as of 2020, had successfully paid off their mortgages. Why do millionaire tend to do this? For financial freedom.
If you downsize from a 3,000-square-foot home, for example, to a 1,500-square-foot one, you need to reduce furniture and other possessions to account for the loss of nearly half your space.
A recession can flip the script of traditional financial best practices. Eliminating debts can be helpful, but it depends on the type of debt. For example, cutting down your credit card debt will be a huge help, while aggressively paying off personal loans could put you in a delicate financial position.
A: If you put extra resources toward a home loan, you'll no longer have access to that cash flow and that's one of the disadvantages of paying off a mortgage.
Even after paying off your mortgage early, real estate prices could plunge, leaving you with a potential loss. “The thing is, no one can give you a guarantee on an investment,” says Bowen. “You can put your money in the stock market and lose it.
If you are able to afford only a fixed amount every month to pay off debt, taking out a home equity loan to pay down your loan balances can help you settle debt more quickly. A lower interest rate means that a greater portion of your monthly payment each month goes toward paying down the principal.
However, research suggests that many people contemplate downsizing as they approach retirement, typically around their late 50s to early 60s. A Zillow report found that on average, most people who downsize are 55 years old.
There's no right age to downsize your home. However, people tend to make this decision later in life, as their kids fly the nest and they're moving towards retirement. This is why planning for retirement as early as possible will enable you to explore new possibilities ahead.
Key Takeaways. Most adults age 50–80 want to stay in their homes as they grow older. Moving to a smaller, more manageable home as you grow older is known as downsizing. Exploring the financial, social, and safety outcomes of downsizing is crucial before you make the decision to move.
In general, you must pay off any mortgage or loans secured on a home when you sell the property. You can list the property for sale and go through most of the process while still owing a balance, but you must pay the loan off as part of the closure of the sale.
April, June, and July are the best months to sell your house in California. The median sale price of houses in June 2023, was $796,400, which is expected to grow more in 2024. However, cities like Arcadia and San Mateo follow an upward trend throughout the year.
It's possible to remortgage to help clear your debt by using the equity you have in your home to increase your mortgage. This will leave you with additional funds which can be used to pay off debts, such as credit cards or a car loan.
According to Dave Ramsey, a home seller can expect to spend about 15% of the sale price of the home in transaction costs. When you break that down, that's a ton of cash. "If you sell a home for $300,000, you might pay around $45,000 to cover selling expenses," Ramsey explained.
Introduction: My name is Arline Emard IV, I am a cheerful, gorgeous, colorful, joyous, excited, super, inquisitive person who loves writing and wants to share my knowledge and understanding with you.
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