House equity

Retirement Life: Is It Still Beneficial to Downsize Your Home?

When Linda and Gary Hansen downsized in 2014, they did pretty well. They sold their 3,300 square foot home in St. Louis for $325,000; trade in for a 1,900 square foot home in Largo, Florida – and bank around $40,000 in the process. They paid in cash, so there was no new mortgage payment to worry about, and they were able to achieve their dream of retiring at the beach. (Their house is only two miles from the coast).

“I never wanted to be cold or see snow again,” Linda says. “I tell people the only thing I want to see that’s white on the ground is white sand.”

But that was eight years ago. Now their Largo home – for which they paid $288,000 – is worth more than double. And their downsizing goal by the beach? Linda says that wouldn’t be possible with today’s inflated prices.

“Now with the Covid madness, our house would be worth around $625,000,” she says. “We wouldn’t be able to buy it now.”

With house prices up 19% in the last year alone, downsizing is no longer as affordable – or profitable – as it once was. Which begs the question: is there still a financial gain in selling big and buying small?

It’s possible, experts say, but the current market could pose challenges. Are you planning to take advantage of the equity in your home and buy? Here’s what to think about before you do it.

High house prices

Soaring home prices are the first hurdle facing today’s downsizers. Unlike in the Hansen era, most markets do not have homes under $300,000 readily available (the national median home price is now well over $400,000).

Prices in Sun Belt states — popular retirement spots for the elderly — are even higher. In Orlando, the median home price is now $450,000, up 32% from a year ago. At Miami ? That’s $627,000, a whopping 46% increase.

“You’re likely going to sell at the top of the market and get the most profit possible for the property you own today,” says Scott Lindner, National Sales Manager at TD Bank. “But on the other hand, while you’re looking to make your new discounted purchase, you’re going to be spending a premium on the property – even if it’s smaller.”

Small houses are also subject to intense competition. Housing inventory is limited, and since most first-time home buyers compete for homes with modest square footage, this results in bidding wars and – surprise, surprise – even higher prices on these smaller properties.

The typical home that went under contract in March was just 1,720 square feet, according to a report by real estate broker Redfin, condos and townhouses — other top choices for downsizing — are also getting bigger. popular.

“Whatever tiny house you choose to buy, it’s likely to be a lot more expensive than it otherwise would have been,” says Rebecca Awram, mortgage adviser at the Seniors Lending Centre. “So you get less value for your dollar.”

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Expensive moving costs

There is also inflation to fight. With inflation in the United States at 40-year highs, virtually everything involved in a move will be more expensive – supplies, storage, movers, truck rentals and, of course, the gas needed to haul your stuff around. your new home.

“As you downsize your home, you may also need to downsize your furniture – whether it’s replacing a sectional sofa with a smaller sofa or replacing a king-size bed with a queen- size,” says John Fischer, head of corporate lending at Bank of America. That, along with expenses like estate agent fees, means “moving costs can add up quickly,” he adds.

Capital gains taxes are another significant cost you may face. Under IRS rules, you won’t owe taxes on the proceeds from the sale of your home if they’re less than $250,000 (if you’re filing solo) or $500,000 (if you’re filing). as a married couple). If you earn more than these amounts when selling your home, you will owe up to 20% capital gains tax on the profits, or $40,000 on a gain of $200,000.

In a typical real estate market, these are easy thresholds for most sellers to cross — but with today’s inflated home values, not so much. Robert Elson, real estate agent at Coldwell Banker Warburg, recommends estimating all of these costs in advance, well before deciding to downsize.

As he puts it, “downsizing might be the right path for seniors who want to live out their golden years with more money in the bank, but not always.”

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Rising mortgage rates

Unless you have the cash to buy your new home, downsizing might not be worth it financially. Mortgage rates have jumped more than 2.5 percentage points since the start of the year, and financing a home purchase is now significantly more expensive than it was a few months ago barely.

According to Freddie Mac, the current average rate is 5.78% on 30-year loans. On a $400,000 home, that would equate to a monthly payment of $2,341 and $443,000 in interest charges over the life of the loan.

“If you have a mortgage on your current home and are looking to finance the next one, keep in mind that rates have gone up and the rate you would get could be higher than your current home,” says Rob Heck, vice president of mortgages. to Morty. “While downsizing may present savings, you need to weigh this against the interest you will pay over time, particularly if you are on a fixed income as a retiree.”

More than costs, however, Heck says you should also consider your ability to qualify for a mortgage.

“Many retirees have a harder time getting financing for their retirement homes because they’re unable to show the steady income stream that lenders are looking for,” says Heck. “Conventional and government mortgages are typically underwritten based on income, not assets.”

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Downsizing done right

Downsizing can certainly come with emotional and personal benefits, but with current economic and housing conditions, financial benefits are harder to come by.

“In today’s market… it may not be advisable to [downsize] now, but wait until interest rates stabilize and housing stock increases over the next two years,” says Kimberlee Davis, managing director and partner at wealth management firm The Bahnsen Group.

If you choose to downsize this year, carefully consider the market in which you are buying your smaller property. Look at housing metrics – house prices, competition, number of listings, etc. – as well as the cost of living and local property tax rates.

“Moving to an area with lower property taxes could help free up space in your monthly budget,” says Heck.

There are also alternatives to downsizing. You can sell your house and move into an RV (although high gas prices can pose a challenge), or you can rent out your house and move into a rental in your dream retirement location. Both would allow you to avoid the high house prices and mortgage rates that come with today’s market.

“If you make a profit on the sale of your home, you can invest the proceeds and that can help with cash flow in retirement,” Davis says. “It can also give you the flexibility to travel with less concern for property maintenance.”

If you need extra cash, home equity loans, HELOCs, and reverse mortgages are also options. Just be sure to talk to your financial advisor or tax professional before you pull the trigger.

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