Most of you know that I’ve had a burning desire to downsize for years.

A comment from a reader, Dora, really stuck in my mind. They were spending $4000 a month on their mortgage:

My family (myself, husband, 2 year old, and 6 mo. old) are downsizing. We have lived in a 5800 sq. foot house since our children were born and now: (drumroll please), we are moving to a 1400 sq. foot house. We are making a choice to live below our means. We chose to stay in the same neighborhood, so we are not losing schools, neighbors, etc. We have some financial freedom (an $800 mortgage will do that), so we are considering this an experiment. I would say go for it, worst that can happen is that you want to move back in a couple of years.

Every summer I revisit my desire to downsize, and this summer is no different, especially with Dora’s comment in my mind. However, each time we consider the idea, we end up staying put.

After I went through the exercise of deriving an implied rent that we’re paying ourselves to live in our house, I found it to be excessive. We’ve always known this, but after putting it on paper our housing expenditures seem downright foolish.

And this summer is no different, I’m going to drag you through my thought process once again! However, a few things have changed this year, which could actually make the case finally sway in favor of downsizing this year, or just keep me stuck in analysis paralysis forever…

New Factors in the Equation

New development in school boundaries. One of the biggest factors that I always come back to is the school system. But now, just like in Dora’s case, we could stay in the same school. Developers are putting the finishing touches on a new, small development right next to ours, so building a new house would mean staying in the same schools.

No competition. In addition, all of a sudden, there are no 4 bedroom houses for sale in our neighborhood, creating an advantage for sellers, which hasn’t existed during the 5 years we’ve lived here. There are actually people renting waiting for houses to go up for sale in our neighborhood; we emailed one family waiting just to test the waters.

Prices are up. Finally. Houses are selling for an average of $175 per square foot right now. And the last few that went up for sale have all sold in 2-3 weeks. Now, we’re at a value still below what we spent to build the house, but one we’d be happy with.

So, the market is right to sell, and we’d have a place to build, some of the limiting constraints in years past.

Housing Options

Current House. Our current house is 3700 square feet. We like our neighbors, our neighborhood, and the school that our son will start kindergarten at in the fall. The long term appreciation of the house should continue to outperform other neighborhoods in our area. Obviously, we have excessive square footage, and maintaining a house this size is more expensive than a smaller one. When you look at it from a cash flow standpoint, this house is a drain; from a long term net worth standpoint though, most of those savings are offset, but you sacrifice liquidity.

New House. Our goal would be to build for half the price of our current house. However, having gone through the building process before, I know that it isn’t that simple. We’ll budget for a maximum of $400,000 ($101,000 for the lot and about 2600 square feet at $115), but our goal will be to come in way below that. However, we’d have to live in temporary housing while we build for about 5 months, which means moving twice. And there’s the possibility of a change in interest rates before the house is completed. In addition, the new neighborhood won’t have the national recognition that our current one does, so I would estimate that the appreciation (or depreciation if Shiller is right) may not keep pace with the current house, but we would have a significant change in cash flow to invest outside of the real estate market, and more liquidity with those investments.

Housing Numbers

Ready for a data dump of all the numbers to make your head spin? Unless noted the amounts are monthly numbers:

Current House:

  • House Value: $629,000
  • Mortgage: $446,079, $2095 monthly at 3.375%, 27 years remaining
  • HELOC: $61,500, $166 monthly at 3.25%
  • Real Estate Tax: $900
  • Homeowners Association: $31
  • Homeowners Insurance: $85
  • Utilities (water, gas, electric): $267
  • 5 Year Mortgage Payoff: $452674

New House:

  • Value: $400,000
  • Mortgage: $320,000, $1414 at 3.375%, 30 year loan ($1503 if you make a comparable loan on 27 years)
  • HELOC: $0
  • Real Estate Tax: $650
  • Homeowners Association: $20
  • Homeowners Insurance: $40
  • Utilities (water, gas, electric): $167
  • Savings for building less than $400,000 budget: ?
  • 5 Year Mortgage Payoff: $286410

Costs to Move:

Here are the total costs to move:

  • Closing Costs: $6300
  • Construction Financing: $3200
  • Movers: $2000
  • Storage: ?
  • Temporary Housing: -$8400
  • Lump Sum to Reinvest: $38321

What Should We Do?

I updated my old spreadsheet, which measures the impact to net worth in the long run. But to be honest, my answer goes in circles, and I’m stuck. Without knowing what the rate of appreciation or depreciation on the houses will be, and without knowing what the stock market will do, and what tax brackets will be in the future, I can pretty much make the answer anything I want it to be by changing those variables.

So, I’m going to put it up to a vote! (Now, I’m not saying we’ll necessarily do what the majority votes for, but I’d love to get your input… and I’m secretly hoping for some eye-opening, earth shattering results!)

In addition, I thought just getting it all on paper would help me think through it rationally! What do you think?

* This poll is closed. *






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Comments to Should We Move to a Smaller House?

  1. Madison,

    Moving is a real pain in the $%#@! The reader Dora’s example is very extreme, and judging by your numbers, the cost savings will not be quite as large. Here are a few more financial and non-financial factors to consider, but I am leaning towards NOT moving:
    - The emotional and physical stress of moving that will be placed on your family
    - Additional costs, such as new furniture and fixtures. I am sure that you will want to purchase newer furniture, window treatments, etc.
    - You never mentioned that you are struggling to pay the bills, and based upon your other postings, I don’t think this is the case. If you are spending a low percentage of your income on housing costs, than do you really need to reduce it more and disrupt your life? As long as your other savings and spending goals are being met, then why make an unnecessary change?

    Joseph B.

    • You are right Joseph, we aren’t struggling, and this isn’t a move that is driven by a need to spend less.

      Rather, a want to spend less, since I think our spending on housing is excessive. While my plan would be to invest the savings, I do think that spending that money elsewhere in our lives could provide some enrichment for the whole family – some of the stuff I’m too cheap to spend money on right now – like foreign travel.

      You have so many great points about the non-financial factors, of which there are plenty!

      Madison

  2. I think it would be worthwhile to downsize since you now have been through the “building process” once and have plenty of knowledge of how to streamline or enhance the construction of a new home. You’ll get more for your money the second time around.

    JannyPi

    • Thanks JannyPi! We definitely won’t make the same mistakes twice!

      Madison

  3. So, a downsize should reduce your mortgage by $126k (I have no idea what a HELOC is) which could easily be more than compensated by the higher resale price of your current home longer term. That doesn’t make downsizing look that attractive financially, in my opinion.

    However, you are estimating that you will save $1100/month by moving. If that saving facilitates major desirable lifestyle changes, then I’d consider it, but know that building costs, construction time and interest rates really have only one way to go in the future (which could negate any benefit you’ve noted on paper.)

    Carmen

    • Hi Carmen,

      Thanks for your input!

      A heloc is like another mortgage. I use it to finance various other investments.

      Madison

  4. And I forgot to mention the stress, rental inconvenience and family time cost of building another home.

    Also, you don’t mention whether there will be any profit in building your next home. Presumably you are planning to spend, for example, 400k to end up with a house worth 500-550k, which swings a downsize more in your favour financially. If there’s no profit to be made, I would reconsider the plan details (eg forget building and buy a smaller home?)

    Carmen

    • We found out during our last build that counting on any profit during a custom build is a recipe for disaster.

      You get what you build. So if it cost us $400k to build, the house would probably only be worth $400k (possibly less).

      While you don’t see profit, what you do get is a house the way you like it.

      Madison

  5. Don’t forget about all the stuff that you’d have to downsize. With space comes stuff, and you’d have to get rid of a percentage of your stuff along the lines of what you’d be downsizing. Walk through and take inventory of all your things and get a feel as to what could go. If you find you might be having problems there, you might need to spend some more time on this. Otherwise, I think you’ve already made your decision!

    Money Beagle

    • Good idea Money Beagle.

      I know we have way too much stuff, and I’d love to get rid of some of it. A walk through is great way to figure out what I want to get rid of.

      Madison

  6. Wow, your real estate tax is really cheap. I think its funny how its all a matter of perspective. We have been thinking lately about downsizing from a 1500sf house to a 1000sf condo. We would have to get rid of a lot of stuff, but we are nearing retirement and we want to rid ourselves of everything we have to take care of such as a yard, “stuff”, and maintenance. We want to play in retirement rather than keep up a house. So I guess what I am saying to you is, think about your stage of life and the quality of life. Is the big house a drain on that quality? If not, then stay put for now. If you can see it being a drain in the not-to-distant future then downsize.

    Norman

    • Norman,

      Isn’t it funny how relative numbers are? Here I was cringing every year when I write the check for almost $11,000 in property taxes!

      I can’t wait to hear what you decide about the condo. Before kids we actually downsized from a house to a condo (before the house we’re in now). We lived in a condo building with all retirees… it was great! No yard work, no maintenance – a great carefree lifestyle.

      We’ll put a lot of thought to the quality of life together with our current stage of life. Right now with our little kids, I don’t think it is a drain on quality of life. Obviously, we’ll downsize once they move out – but we still have 17 years until we get to that stage!

      Thanks for your thoughts!

      Madison

      • I had a hearty laugh when I read your reply. I was reading it as $900 per year in real estate taxes! To make you cringe even further, my property tax for the YEAR is $1,100. But if it makes you feel any better, we have lousy roads.

        Norman


  7. So you’ll save $1250 / month and immediately reduce your mortgage debt by $187,000, and further savings with the interest long term (taking the appreciation/depreciation variables out of the equation).

    Are you planning on having more children? You just have one son right now? If you’re done at one child, honestly 2600 square feet is still overkill, you could consider 2400 or 2200 square feet which would still be plenty for a family of three and reduce the cost even further.

    Would staying in the current house while the new one is built be an option, removing the need to move twice?

    You say you like your current house and neighborhood, but the fact that this option is even on the table means you can’t be THAT tied to them.

    Lastly, what are your other financial goals? How would these changes impact those goals? Better education for children? Retire earlier? Travel more?

    cecil_t

    • Hi Cecil,

      We have three kids right now – ages 1, 3, and 5. I’m pretty sure we’re done. We had a 3 bedroom, 2200 square foot home once before, and I think that would be sufficient once again. Although I think I still might want the 4th bedroom since we have 3 kids. We’ll have to tour some more houses to find out exactly how much square feet we can get away with.

      Staying in the house while we build could be an option, but then we’d be at the risk that our house wouldn’t sell when the new house is ready. We did that last time we built, which was fine since the market was booming, but I don’t know if I want to take on that risk now.

      And you are right, I’m not tied to my neighbors. Thanks for putting that in perspective!

      Like I mentioned to Joseph, above, I think that we’d use the excess money mainly to invest. I haven’t actually thought about it in terms of what we want to spend the money on (besides possibly some extra travel). This desire to spend less is just the frugal side of me thinking that our housing is excessive right now.

      Thanks for all of your comments – you’ve really given me a lot to think about!

      Madison

      • Madison -

        So just some more thoughts from what you’ve said. I think you definitely need to see it in the context of your overall budget.

        If all of your other financial goals are on track and fully funded, then it’s OK to have some excess in the house (or wherever) if you enjoy it; no need to be frugal about everything. On the other hand, if $1200 / month could make an appreciable dent in other important goals that aren’t currently on track or being funded as much as you’d like, then yes the house is the biggest target to look at to make up the difference.

        One last thought in favor of downsizing: in a very large house it’s easy for the family to get spread out and end up isolating themselves. Very close families come from living in a more confined (cozy) house where sharing space is necessary. I know of 6-person families living in 1800 sq. ft. or less and doing just fine.

        cecil_t



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