I tossed out the idea of buying a less expensive house in Should We Downsize?. Readers came to the rescue with lots of great points to consider in Should We Downsize? More Considerations.
After a lot of thought, we made our decision. We will not be downsizing.
Financial Impacts of Downsizing
Ironically, I envisioned dollars falling from the sky by selling our house and buying one for about $150,000 – $200,000 less. You would think that would be the case, right?
Wrong. I put together a spreadsheet to compare the different scenarios. The first option is to sell our current house, and buy a new one for less. The second option is to stay put.
Savings. Our mortgage payment would drop by $500-$700 a month and we would have lower taxes, utilities, and homeowners dues associated with a less expensive house. In addition, I assumed that with the extra cash out and the savings each month, we’d put it in savings or CD’s to earn interest.
Expenses. We would have to pay Realtor fees to sell. We would incur upfront closing costs and the cost to move. In addition, the lower loan payment would also mean less tax savings since we itemize.
Appreciation. Our area has been seeing 1% appreciation per year over the last few years while other areas had significant depreciation. I actually did projections for each appreciation rate, negative and positive, just to make sure I wasn’t skewing the numbers in my favor. The more positive the appreciation, the lower our savings.
Results
Get this! If we look at the difference 5 years from now… Our savings would be less than $140 per month. What appeared to be a significant monthly savings in mortgage payment, was all but eaten up by other costs and factors.
We asked ourselves this question before: “We love our house and our neighborhood, but we’re trying to decide if it’s really worth the premium we pay to live here. Would we be just as happy in a smaller house?”
Now we know our “premium” is only $140 for great schools, a fabulous neighborhood, and a house built exactly to our specifications for our growing family. We can finally answer, yes, it’s worth it. And we’ll be staying!
Action Plan
This was a very valuable exercise to complete. I’d recommend that anyone considering a similar decision sit down and lay out all the savings and expenses. Don’t be fooled by a lower mortgage payment; account for all the financial factors.
Once you determine the true financial impact, you can evaluate it based on your non financial criteria. We are now very happy in our house, knowing it really isn’t that expensive after all!
Could you provide more solid numbers? I just can’t figure out how you would only save that small amount. A quick back-of-the-envelope figuring:
Let’s say you buy a house that’s $150,000 less and you have $50,000 in related expenses. That’s $100,000 less in a mortgage you have to pay over 30 years (not even counting interest payments). Over 30 years, that’s a savings of $277 a month. Just by not spending $100,000 on a house.
And while your taxes would “go up” because you’d have less interest to deduct, you’d be paying less interest overall plus, more than likely, less in real estate taxes. That should be another savings.
I just don’t see how downsizing this significantly wouldn’t change things monetarily in the long run.
Maybe it’s far more complicated than this, but I just can’t imagine that the other factors would affect the outcome as much as have $100,000+ less on your mortgage to pay.
@ AnnMarie: I thought about embedding the spreadhseet, but it has so many of my chicken scratches, it wouldn’t make much sense.
However, from a total net worth perspective, paying down principal doesn’t really factor into the savings much, only the interest does.
Eventually you would sell either house. So you have to consider that too.
In your example, you “save” $100,000 on the house by not paying that principal portion down. So you would essentially have that much in a savings account if you put the excess in each month.
With the more expensive house, you would spend the $100,000 on paying down principal, but when you sell, you would have $100,000 in equity. That’s assuming 0% appreciation.
When I did the comparison, I figured we would sell each house in 5 years.
The actual comparison is the final sale price of each house, less the loan balance and selling fees. Then you add in any tax savings and the savings account balance where you were storing the savings each month.
Does that help?
P.S. I’ll work on putting together a detailed example soon. That way you can see exactly how it works.
Not thinking about downsizing, but we studied carefully my decision of going back to an office job vs keep trying to work my way in the freelance world.
Most people would have said that, considering I was averaging a 20% of what I would earn working at an office, the answer was simple. It turned out not to be. I would only earn 250$ more going to work there, and I wouldn’t be following my dream as I am now 🙂
Glad you found a decision that works for your family!
Aside from “your premium” being a somewhat deceptive way of putting it, there’s definitely a lot to be said for “sunk costs.” I.E. I’m sure your numbers would be quite different if you included the closing fees and other fees that went into buying your current house, but since those are “sunk costs,” they don’t really matter any more.
@ Rassah: Very good point on the sunk costs. If we didn’t already live here, the numbers would look very different! For example, if we were renting right now and trying to decide which house to buy, the savings with the less expensive house would be much more.
Glad you made a decision which make sense for you. Can you please share some version of your spreadsheet?
With the amount of research you put into this decision, I’m sure it will be the right one for your family. In the long run, a couple hundred dollars a month isn’t worth uprooting and settling for less when you already have what you want.