Being in debt is never pretty. Most people desire to own their own property at some point in their lives. Once that happens, those same people will probably have to take out a mortgage in order to be able to afford a house. That’s just the way things work. Of course, later on, if you are in a good state financially, you can even decide to buy a second house. It doesn’t matter how many properties you own – unpredictable circumstances, such as losing your job, could shake you up financially. That’s when you will start to look for a way out of your debt. Once that thought starts swarming around your head, the thought of downsizing to pay off a mortgage is bound to follow. But is downsizing a good idea? Well, there are probably a lot of expenses involved that you haven’t considered.
Downsizing to Pay Off a Mortgage – isn’t Cost-free
Many people have the impression that all of their problems will be solved by moving into a smaller house. Well, all the financial problems, at least. In reality, moving to a smaller home may not be as cheap a process as you are imagining. Moving, whether to a bigger or a smaller house, is never cheap. It comes with a plethora of expenses and intricacies, many of which you might not be able to pay off. While there are some things you can do before the movers arrive to prepare for the process of relocation and make it more affordable, you will nevertheless have to count on some inevitable expenses.
Interest Penalty
If you already have a mortgage on a house and you want to start shopping for a less expensive home, the first thing you should do is to factor in the interest penalty. That would occur if you originally purchased when interest rates were lower and now they are higher. Of course, it is possible that your new mortgage interest rate would be lower as well but be sure to take into consideration the difference in the prevailing interest rate and the rate you were paying on your old home.
If you have taken out a mortgage as a first-time buyer, then you might have gotten special terms and conditions which you wouldn’t be eligible for as a second time buyer.
A Plethora of Taxes, Fees and Commission
Since you have already gone through one home buying process, you probably know how many taxes and fees you will have to pay. And if you use a Real Estate Agent you will have commissions on both your sale and purchase. Sales commissions often cost 7% of your purchase price, which means they reach thousands of dollars.
Bear in mind that these taxes and fees can include anything. From legal fees to land transfer taxes, it might seem like the list of the things you need to pay for goes on and on. If you have already paid off a large portion of your mortgage, does it really pay off to spend thousands of dollars on extra fees and taxes?
Closing Costs
If you are thinking about downsizing to pay off a mortgage, then you need to sell your home. And selling your home is a process that is accompanied by a bunch of different costs – including closing costs. It is estimated that these range anywhere between 2% to 6% of the sale price. Closing costs are supposed to cover your real estate agent’s fee, whose services you should definitely be using if you are selling a house.
Closing costs can also include staging costs, home inspections, appraisals, and different selling expenses. Of course, you could decide to work with a low commission real estate firm in order to cut the costs. But you really need to think about whether that would be a good decision, as there’s a lot on the line. Usually, it always pays off to invest in more expensive services if they keep you and your property safe.
Relocation Expenses
Downsizing when paying off your mortgage isn’t just about selling your current home and moving into a new one. This process also entails moving out of one house and into another one. Every person who is relocating usually has two options – you can either move DIY-style or pay for a professional moving company. There’s no telling which one might be better for you, as that depends on many different circumstances.
The majority of people usually decide to get some moving assistance, and every type of help during relocation will cost you. The expenses typically range from a thousand dollars up to 7,000 or 8,000 dollars. Bear in mind that even if you decide against hiring a moving company, you will still have to pay for cardboard boxes and packing supplies, so you can’t move completely cost-free.
Should You Downsize to Pay Off Your Mortgage?
That really depends only on you. If you think that downsizing to pay off a mortgage is the right next step for you and your family, then by all means, feel free to do so. Perhaps you live in New York and want to move to a smaller home in one of the most affordable cities in the States. In that case, you might be able to get yourself out of this financial predicament by downsizing. A lot depends on the cost of living in the new home compared to the old home. Even if you stay in the same city it is quite possible that a smaller home will save you thousands of dollars a year in expenses like Real Estate taxes (because smaller houses pay fewer taxes), your utilities would probably be less, there are also intangibles like a smaller yard to take care of, less maintenance, and just less house cleaning. If you have substantial equity in your old home and can buy your new (smaller) home for all cash and eliminate your mortgage that can make your monthly expenses less and make all the difference in your lifestyle. So ultimately the decision is yours but be sure to weigh all the expenses involved before deciding.
