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.
Tips for calculating your mortgage:
Aim for 20% down payment
Don’t believe what they say you can 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.
Other posts you’ll love:
13 Proven Methods to Accelerate Debt Payoff
A Funny Thing Happens When You Become Debt Free
How to Get Out of Debt on One Income
How to Pay Off $6,000 of Debt in 6 Months
Consider investing in a foreclosure
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.
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.
Advantages. Equity utilization: If you've built enough equity in your home, selling it can provide a significant sum that can be used to clear a large chunk, if not all, of your debt. Avoiding foreclosure: For homeowners struggling with mortgage payments, selling can prevent foreclosure, preserving your credit score.
Downsizing is when you buy a smaller home than the one you currently have. This is often a decision made by those who now have an empty nest, are struggling to deal with the upkeep of their home or are finding the related costs hard to deal with.
If it's expensive debt (that is, with a high interest rate) and you already have some liquid assets like an emergency fund, then pay it off. If it's cheap debt (a low interest rate) and you have a good history of staying within a budget, then maintaining the mortgage and investing might be an option.
Here three for which downsizing might not make sense for you: Less living and storage space. You might want to keep a larger home that gives you plenty of room for hobbies, storage and anything else that comes up. Leaving a neighborhood you enjoy.
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. That means it's important to establish an emergency fund first — generally three to six months of living expenses — for unexpected financial needs.
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.
For example, if you're earning $9,000 monthly, no more than $2,700 should be spent on mortgage, insurance, maintenance, and tax payments. If you find that monthly household payments impair your ability to buy essential items, such as food, gas, and medical care, it may be time to consider downsizing your home.
Completing a mortgage payoff early could save you a bundle of money, not to mention years of not having a big payment hanging over your head each month, according to Dave Ramsey, financial guru, author and host of “The Dave Ramsey Show.”
Increasing your monthly payments, making bi-weekly payments, and making extra principal payments can help accelerate mortgage payoff. Cutting expenses, increasing income, and using windfalls to make lump sum payments can help pay off the mortgage faster.
Throwing in an extra $500 or $1,000 every month won't necessarily help you pay off your mortgage more quickly. Unless you specify that the additional money you're paying is meant to be applied to your principal balance, the lender may use it to pay down interest for the next scheduled payment.
If you have a substantial amount of high-interest debt, consider paying it down before saving for a house. Any interest – but especially high-interest debt – can significantly extend your debt repayment timeline and eat away at the money you could be saving for a home.
Pay minimum payments on everything but the smallest debt. Throw as much money as possible toward the smallest debt until it's paid off. When it's gone, roll what you were paying on that debt into the payment on your next-smallest debt until you knock it out too.
So, if you don't have a budget that you stick to, I would not recommend that you use your savings to pay off your debt. If you pay off your debt but don't have a budget that you actually use to monitor your spending you may end up back in the same situation.
Downsizing your home in retirement can reduce your housing expenses including mortgage payments, property taxes, insurance, and maintenance costs. Additionally, a smaller home often means less upkeep and maintenance, freeing up time and resources for other retirement pursuits.
Introduction: My name is Jonah Leffler, I am a determined, faithful, outstanding, inexpensive, cheerful, determined, smiling person who loves writing and wants to share my knowledge and understanding with you.
We notice you're using an ad blocker
Without advertising income, we can't keep making this site awesome for you.
