Three years ago our family of 5 decided that moving into a smaller house to pay off debtand start to save money. For us, it was the right thing to do. Our marriage was suffering and we were sick and tired of living the paycheck to paycheck life. Truth be told, downsizing to a smaller house might not be the right answer for everyone. So how do you know if it’s right for you and what can you do to get started?
Mortgage = 25% of your income
A crazy thing happens every day and no one is talking about it. People apply for a mortgage loan and they get approved for a price way above what they should be paying.
On top of that, many young couples get swept away by the fun of house shopping and tend to work their way up to the higher end of their loan amount.
What people don’t tell you is that your mortgage should be around 25% of your take-home pay. That means:
If you find yourself paying more than 25% of your take-home pay toward your monthly mortgage payment, it is definitely a sign that you should consider moving into a smaller house to save money.
Before putting your house on the market, it’s important that you take into account what your potential profit might be. Zillow is a great option when you are looking to get an estimate for what your house might be worth.
Just type in your address and you’ll see the full purchase history and a list of local houses that have sold recently near you. Zillow uses this information to give you an estimate of your home’s value.
Keep in mind that if you have made updates or additions to your home, there is a chance that its value has gone up more than Zillow knows.
Because you will want to have a significant down payment (20% is recommended) when moving into a smaller home, it’s important that you make sure selling your house will be profitable enough to benefit you.
Keep in mind that besides a 20% down payment, you’ll be paying a realtor around 3% plus closing costs.
Don’t forget to take into account the moving costs, an appraisal on the new house and any updates or purchases you’ll need to make.
What if selling won’t turn a profit?
If selling your home will not give you a significant enough payout to help you purchase a smaller home to pay off debt, there are other options to consider.
Renting or hosting your home
You know your home is too expensive, and that reducing the mortgage cost could significantly help you pay off debt, but selling it won’t get you anywhere. If that’s the case, many families will move in with family for a year while renting their home.
If you don’t have family to live with, you could always consider trying a home-hosting site like Airbnb that allows you to host your entire home or even just a room. To see how much people are charging in your area, check out the Airbnb calculator.
How much house can you afford?
Once you’ve figured out your profit potential and whether or not selling your house is a wise choice, it’s time to start looking at how big of a mortgage you can afford.
Using a mortgage calculator is one of the best ways to get a visual idea of how much house you can/want to afford.
Tips for calculating your mortgage:
Aim for 20% down payment
Don’t believe what they say you can afford
Try to keep your debt to income ratio at 25% or lower
Even at 25% our family’s suggested monthly payment is $700 more expensive than our current mortgage. Remember, you want a smaller home to pay off debt. The cost of your monthly mortgage payment will have a direct effect on how much debt you are able to pay off.
Other posts you’ll love:
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How to Get Out of Debt on One Income
How to Pay Off $6,000 of Debt in 6 Months
Consider investing in a foreclosure
To cut back on the costs of your mortgage while still potentially getting a slightly larger home, looking into potential foreclosures is always a good option.
Browsing foreclosures near you can help you cut back costs and offers you the opportunity to make improvements and potentially sell the home in a few years at a large profit.
Pay off debt
Any profits you make beyond 20% would be wise to use in helping to pay off your other debts. From there, I recommend following Dave Ramsey’s 7 Baby Steps to help with debt payoff, saving money and building wealth.
Don’t let the prep work overwhelm you. I promise downing to a smaller home to pay off debt is possible. After just 3 years my family and I were able to completely knock out our debt and finally begin living the life we have always dreamed about.
The smaller the balance, the quicker you can make it happen. Once you make a dent in what you are paying on a mortgage, you can think about diminishing other debts, like student loan payments and medical bills. According to Chris Hogan, downsizing will help you permanently kick debt to the curb.
If you're unable to pay all the bills included in your monthly budget, you know you're in too deep. Further, if you can't imagine a way to come up with the extra funds needed, selling your house could make sense. Before selling, though, make sure you have someplace else to live.
Downsizing your home means that you trade your present house for a smaller or less-expensive one. For instance, you might switch over to a condo or townhouse, or you could move to a home similar to yours in a more affordable area of town.
The sooner you start saving for a down payment, the sooner you can use that money to actually get into your own house and start paying down the home loan balance. That's how you increase your equity in your home. The bigger the down payment you give a lender, the lower the interest rate on your mortgage will be.
If you downsize from a 3,000-square-foot home, for example, to a 1,500-square-foot one, you need to reduce furniture and other possessions to account for the loss of nearly half your space.
A: If you put extra resources toward a home loan, you'll no longer have access to that cash flow and that's one of the disadvantages of paying off a mortgage. That means it's important to establish an emergency fund first — generally three to six months of living expenses — for unexpected financial needs.
Even after paying off your mortgage early, real estate prices could plunge, leaving you with a potential loss. “The thing is, no one can give you a guarantee on an investment,” says Bowen. “You can put your money in the stock market and lose it.
This question has no definitive answer, as it depends on individual circ*mstances and lifestyle. However, research suggests that many people contemplate downsizing as they approach retirement, typically around their late 50s to early 60s. A Zillow report found that on average, most people who downsize are 55 years old.
The responses find people believe 66 is the ideal age to downsize as they reassess their lives and plan for retirement. If you're planning to sell your home and purchase a smaller property in the future, there are positive reasons to do so, including these three.
If your needs and priorities change, a smaller home may suit your new lifestyle. In some cases, it can also free up cash and save you money. There are many advantages to switching to a smaller house, yet it really depends on what stage of life you're at and what you want from your home.
Also, keep in mind that you'll need to have enough cash for closing costs and other savings needs. Won't provide as much benefit when rates are low: If mortgage rates are low, you could potentially put that money to better use by investing it or paying down high-interest debt.
Although there is no strict definition for high-interest debt, many experts classify it as anything above the average interest rates for mortgages and student loans. These typically range between 2% and 7%, meaning that interest rates of 8% and above are considered high.
Key takeaways. If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.
Less debt usually leads to a better credit score, especially if you have a history of timely payments. Credit bureaus take note of how much of your available credit you're using, and lower utilization generally leads to a higher score. The journey to become debt-free isn't easy, but it can be incredibly rewarding.
Introduction: My name is Mr. See Jast, I am a open, jolly, gorgeous, courageous, inexpensive, friendly, homely person who loves writing and wants to share my knowledge and understanding with you.
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