10 Reasons Why You Should Trade Down Your Home

If you’re dealing with a tight financial situation, a career crisis, the start of a new business, or you’re just worried about the direction of the economy, you need to read this. Often, after we’ve cut every expense we can — the grocery bill, entertainment, the landline telephones, the credit cards — we’re still left with basic monthly living expenses that come dangerously close to wiping out our income every month. When we come to that point, it’s time to look at the larger components of our living expenses, the largest of which for most is the home.

Sometimes, getting a smaller home is the single best thing you can do for your finances.

As un-natural as this might seem in the grand scheme of things, trading down to a smaller home might be the only option left if finances are tight. Or if you’re tired of economizing on everything else and just want to live your life. Often, by lowering the single biggest expense in your budget — your home — everything else falls into line and balance is achieved.

small-house

Actually, trading down isn’t even as radical as it sounds. People do this all the time — in preparation for a major change in life know as retirement! You don’t have to be on the verge of retirement to be facing such a change, not these days. Trading down should be an option.

What Do You Get for a Smaller, Less Expensive Home?

Lower Monthly Payment

This is the most obvious savings from trading down, and it can be substantial. Cutting your monthly house payment from $2,000 to $1,500 can make a bigger difference over the long run than we think. A $500 per month saving is $6,000 per year, and $180,000 over 30 years! That’s better than an IRA, and we haven’t even begun to add investment income to the equation.

Lower Insurance and Utilities Expenses

Once you’ve sealed every crack in your home, caulked every window and turned off every light, you still can’t do anything about the problem of space. It will cost far more for utilities in a 4,000 square foot home than it will in one that’s 2,000 square feet, if only for heat and air conditioning.

Home owners insurance has been on the rise in recent years and the cost can no longer be easily ignored. The more expensive your home is, the more it will cost to insure. A smaller home will mean lower insurance and utility bills.

Less “Dead Equity” Tied Up in Your Home

The difference between the value of your home and the mortgage balance on it is your equity. That equity doesn’t earn interest for you, and unless you borrow against the property (creating a new monthly payment) you can’t spend it either — hence the term “dead equity”. Higher priced homes tend to have more of this and by trading down to a less expensive one, you reduce the amount of dead equity you’re carrying.

Less Money for Repairs and Maintenance

All houses require repairs and maintenance, but bigger houses just need more. A bigger house means more rooms to carpet, more wall space to paint, bigger heaters, bigger air conditioners — and all of it costs more than it will in a more modest home.

And one other point that’s equally important; larger, more expensive homes are often located in higher priced neighborhoods that are more likely to enforce standards, such as exterior painting schedules, lawn maintenance and other upkeep. When money is tight, they’re tough neighborhoods to live in.

Less Concern Over “Keeping up with the Joneses”

No one ever wants to look as though they live below the prevailing standard in a neighborhood, and in higher priced ones that standard is also higher. Maybe it’s that people in more expensive neighborhoods are more competitive. What ever the reason, it translates into higher priced cars, furniture, clothing and even toys for your children — kind of like an arms race with stuff!. Would you like to get off that treadmill?

A Used Car Won’t Look Quite so Bad in the Driveway

Closely related to keeping up with the Joneses, what type of car you drive is often closely associated with the neighborhood you live in. The more expensive the neighborhood, the more frequently people tend to turn in their cars for new ones. And that can keep you locked in a cycle of perpetual car debt. Move to a less expensive neighborhood, and you might feel better about keeping your car for ten years so you won’t have a payment.

Less Space to Store Stuff You Don’t Need

Have you ever walked into a store, looked at a piece of furniture or exercise equipment but passed on buying it because you didn’t have enough space in your home? Well, guess what? The more space you have the more you’re likely to buy, precisely because you do have the room!

Get a smaller home and you’ll probably find yourself buying less. And you know what? You’re life probably won’t be any worse for not having it. It might even be a little better if the money you don’t spend on stuff ends up in your bank account. Speaking of which…

A Bigger Bank Account

Let’s say you sell your home for $350,000 and walk away from the closing table with $70,000; you then buy a $250,000 home with a 20% down payment equal to $50,000. That leaves a $20,000 nest egg for your bank account. Now start adding the monthly savings from a lower house payment. Get rich quick? Maybe not, but you’ll definitely be heading in that direction.

More Money for Everything Else in Life

The less money you have going into your house every month, the more you’ll have for living your life. There’s a self-image attached to living in certain types of homes, and that image is both more complicated and costly the larger and more expensive your home is. A smaller home might be the ticket to more travel or even a better education for your children.

And the Best Benefit of All: Less Stress!

Less space, less stuff, lower monthly expenses, more money in your budget and in the bank, less worrying about what the neighbors think — all translate into less stress. If you’re in some sort of transition in your life, you’ll need to free up your time, energy, money and concern for dealing with the challenges ahead.

Can you put a price on that?

Photo from Wikimedia Commons.

About the Author

By , on Apr 29, 2013
Kevin
Kevin Mercadante is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids and can be followed on Twitter at @OutOfYourRut.

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{14 Comments}

  1. We are going to downsize our 750 sq ft condo to 500 sq ft

    (2 adult & 1 baby) and preparing the moving make us rethink what is “mandatory”. For each piece of clothes or kitchenware we ask ourselves the question “can we live without it ?”

    Less place is less stuff & much less stress. So much can be borrowed/rented instead of owned.

  2. Kevin says:

    Hi Kelly–I don’t agree that the market can only go up. If mortgage interest rates rise, just to the historic norms of 6-7%, it could throw cold water on that assumption. Prices might resume their downturn.

    Owning a home is no longer risk free. Which is yet another compelling reason for trading down!

  3. Kelly says:

    As tough as it might be, it does make sense. The market is still pretty low though and it can only go up so it may make more sense to wait a year or two more for an upturn to sell.

  4. Wow. I knew there were several benefits of downsizing like saving money on utilities, but that is an impressively long list. If I owned a housed–which I don’t–I’d immediately consider down sizing even if I didn’t need to.

  5. Totally agree with this! We are living in a very teeeeeny tiny apartment that is the size of a hotel room. It really shows you what you can live with! While I am hoping for a bit of an upgrade (like 600 sq ft vs 270!) I now know what we are capable of, and it saves us a lot of money!

  6. We could have lived in a bigger home in a nicer neighborhood. We choose to live simply and the only way we will be moving is if we want to get more land down the road.

  7. Stress seems to be tied to all of the above reasons; great post!

  8. My second home in the UK was only 600 sq feet for 1 and our new home is close to 3000 sq feet. Although I went up in size it’s perfect for us, any bigger and it may be too much house that we wouldn’t necessarily need for 2 of us. Just what you say, the less money going into your house the more you will have. The bigger the house, the more it will cost.

  9. AxeMan says:

    All of these reasons are actually why we are staying in our current home. We have thought about getting a bigger place, but all of these keep us right where we are at.

  10. krantcents says:

    I downsized 15+ years ago. All my expenses went down and I got rid of a big house. My kids had graduated college and moved out and it made sense to do it.

  11. Awesome article and I completely agree with all of it. My family has been downsizing for years, I grew up in a three story house (it is just me and my parents), then it was destroyed in a hurricane so we downsized to a condo of 2,000 sq ft and it saved us a lot of money and expenses. We also sold a ton of furniture when we moved that made quite a profit! We then moved from FL to DC where the apartments are microscopic so we now live in a 1,500 sq ft condo and we have saved a ton of money on electric, maintenance, and grooming even though we are in a pricier area just because we downsized.

    • Kevin says:

      Hi Morgan–The experience of your family highlights another advantage of trading down, and that’s mobility. You were able to respond to a hurricane and to a cross-country move and to improve your circumstances with each move.

      The reverse – trading up at each move – creates stress and drains resources.

  12. Paul Friar says:

    By far the greatest point that really hit me when reading this, aside from how great it would obviously be to save money on all the general expenses that a larger than required home creates, was the point about wasted space.

    I am so sick and tired of never being able to find anything in our “junk room” because there is so much other junk in the way. I would love to throw it all out, and I cannot even remember why half of it is being saved!

    Its crazy to spend money on storage – which is exactly what most people are doing when they have a larger home than they need when they actually stop and think about it. Having more money in retirement should be the most important thing on anyone’s mind, not whether or not you can leave it to your kids or the pain of losing a place with so many happy memories in it. The memories are yours forever, and simply selling the house cannot ever take them away from you.

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