As older Americans approach retirement, many find that they haven’t saved enough. Should you find yourself in this situation and don’t have the time to play catch up, downsizing is one strategy to consider. However, there are a number of costs involved with this strategy that you may not have realized. Before you decide to put up the ‘For Sale’ sign, consider the following and make sure that the benefits of downsizing outweigh the costs.1
Many homes require some fixing up to get them ready for selling. This can potentially cost a homeowner thousands of dollars in repairs and upgrades, i.e. replacing the roof, painting the house or replacing the carpet. Once the house sells, you pay commissions to real estate agents on both sides of the transaction, often around 6% of the home’s value. Then you have to consider the packing and transporting costs. For example, “Packing and transporting enough furniture to outfit a two-bedroom condo will run $1,500 if you move a few miles away and $5,000 or more if you move across the country.” Of course, packing yourself will save you some money. If you store anything like extra furniture that won’t fit in your new place, you’ll have a monthly storage expense. If you decide to ship furniture or other items to your kids in other states, this could cost you a few thousand dollars.1
Depending on what type of home you move to, there can be additional costs involved. For example, if you downsize to a condo, you’ll have association fees, which can run you hundreds of dollars a month. If you move to a condominium building that’s in need of a major repair, you may get hit with a special assessment fee to help cover the cost. When it comes to downsizing, renting is another option. Renting makes it easier to plan your monthly budget, but it does leave you open to periodic rent hikes.1
There are also a couple of other expenses that you may not have considered. For example, you may need to buy new furnishings to fit a smaller space. You may also need to fork over some extra cash for a parking space that you used to enjoy for free. If you move far away from friends and family you may want to spring for a trip back to your old neighborhood a few times a year.1
Despite all the extra expenses of downsizing, there are a few areas that may actually save you money. Moving to a smaller home, condo or apartment will likely reduce your utility bills. You can say goodbye to yard work and maintenance if move to a condo or apartment. Plus, downsizing will allow you to save by either eliminating or reducing your monthly mortgage payment.1
If you’re thinking about downsizing due to financial reasons, you may want to consider a reverse mortgage as a way to supplement your retirement income. A Home Equity Conversion Mortgage (HECM), commonly known as a reverse mortgage, is a Federal Housing Administration insured loan. A HECM enables seniors to access a portion of their home’s equity to obtain tax free2 funds without having to make monthly mortgage payments.3 A HECM for Purchase may also be an option for seniors that want to downsize to a smaller home.
If you’d like to learn more about reverse mortgages or want to find out if you’re eligible, call 800-218-1415.
1 The Surprising Costs of Downsizing Your Home – kiplinger.com, by Jane Bennett Clark, April 2016, http://www.kiplinger.com/article/retirement/T010-C022-S002-downsizing-costs-add-up.html#.
2 Consult your financial advisor and appropriate government agencies for any effect on taxes or government benefits.
3 You must live in the home as your primary residence, continue to pay required property taxes, homeowners insurance and maintain the home according to Federal Housing Administration requirements.
Author: Meredith Manz