3 Money-Smart Reasons Why You Should Downsize Your Home

Downsize your home to have more money

I bet you’ll agree that buying a bigger home represents moving a class up in life.

Or is it?

As incredible as it seems, living large doesn’t necessarily mean living better. Do you know that most families in the U.S. have so much space in their homes that they can actually downsize without constricting their lifestyle?

American homes are getting bigger and BIGGER

Today, the average size for a new single family home is almost 2,600 square feet, which surpasses even the housing bubble period – when homes for a single family averaged 2,400 square feet. This may not seem like a very big house when compared with homes built in recent years, but looking further back will give you the shock of your life.

According to the National Association of Realtors, the average home size back in 1950 was only 983 square foot! However, as the sizes of homes ballooned over the years, the size of families shrank from an average of 3.8 people in 1950 to 2.6 people today.

Looking at the above numbers, it only indicates one thing: homeowners of today are living large!

But do they have to, really?

In most people’s eyes, moving from a big home into a smaller home symbolizes a step down in the life ladder. But this is not always the case if you take a closer look. In fact, it may be the best life move you’ve ever made.

Less is more

Every time I talk to a person about downsizing their homes, they always ask me one question:

Will a small home afford me enough space to keep all my stuff?

Let this not hold you back. There are lots of ways to get rid of the stuff you don’t frequently use and make extra dollars out of it. Craigslist, eBay, and your local yard sale are a few good ideas.

Reduced maintenance

Shrinking your square footage means less space, which can be a good thing. It means you will spend less time and money on maintaining the home. Just think of spending only a few minutes clearing the gutters, weeding the garden, painting the walls, and other unpleasant chores that you would have to spend hours on if you are in a big home.

A smaller home also means that you will save on costs like insurance and property taxes that go up with the value of a home. In addition, it will lead to a reduction in the utility bills you pay every month.

Downsizing may mean that you and your family will have to watch all your popular programs around one television (instead of each having a TV in his/her own room), but this is a good thing. Gathering together in front of one TV is a great way to spend more quality time with your loved ones, which only strengthens the family bond.

The financial sense of downsizing

If you are not yet convinced, let’s delve deeper into the financials that make downsizing such a great prospect for you. Imagine if you could reduce your mortgage by over $500 per month. Or you saved extra $500 each month to put into a investment with decent returns?

Below are three important steps you could make:

1. Pay your debts faster

If you are working hard to become debt free, then moving into a smaller home can go a long way to getting there faster. Wondering how this is possible?

Let’s assume you have an outstanding student loan amounting to $18,000 and its charging interest at a rate of 6 percent. If you pay a minimum of $200 every month, then it will take you more than 10 years to pay off the loan.

What if you added an extra $500 to the loan amount you paid back each month? This is where it gets exiting. You will have cut your loan repayment period by a staggering seven years and eight months. YES, you would be free from a student loan of $18,000 in only two-and-half years!

2. Increase your retirement funds

After getting rid of your debt burden and having an emergency fund that is fully funded, now its time to start building wealth for a better future. Investing 15 percent of the income of your household in pretax retirement plans and Roth IRAs is what most financial experts recommend.

So if you have not yet reached that 15 percent, then an additional $500 could lift you closer to that amount, or even get you there.

And what a difference that extra $500 could make… If you added $500 (per month) to what you saved for retirement every month, you could have an additional $1 million in your account!

How about such an EXTRA amount to spend during your golden years?

3. Clear your mortgage balance

The best way to downsize is to trade in your mortgage for a home that is already fully paid for.

How do you do this? Sell your current home and use the money you get from the sale to purchase a smaller home.

And just think if you had enough where you could pay cash for your smaller home! Imagine if you were mortgage free? Wouldn’t that be awesome?

However, if the amount you realize from the sale of your home is not enough to purchase a small home in cash, all is not lost. You can take a fixed-rate mortgage of 15 years and put a down payment of 10-20 percent (minimum). Then bring the $500 per month, you saved from moving to a smaller home, and add it to your monthly mortgage payment. If we assume a mortgage amount of $200,000 and an interest rate of 4.5%, then you can pay off your mortgage in just over 10 years! And that’s not all… paying off your mortgage that early will save you over $25,000!

Prepared to downsize? You need to start somewhere

Although downsizing may not work in every situation, it’s worth exploring if you are one of those who like simplifying life and saving money.