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Having a larger home can be beneficial to a point. It's nice to have extra space for storage, guests, or even to roam around. But there may come a point when you realize that all that added square footage is limiting you financially. And that's when it pays to look into downsizing. Here are some of the ways your finances might take a positive turn if you move to a smaller home.
1. Lower mortgage costs
You could shave a hefty chunk of money off your mortgage costs if you unload some square footage and live in a smaller space. This especially holds true if you're planning to stay in the same neighborhood.
2. Lower property taxes
Assuming your goal is to downsize within your existing neighborhood, trading a larger home for a smaller one could lower your property tax bill. And that's especially important if you live in a state with expensive property taxes across the board, since the new tax code limits the extent to which you can deduct them.
3. Lower homeowners insurance premiums
A home with less square footage is apt to cost less to insure than a larger one. Downsizing is a great way to cut your homeowners insurance premiums -- without dangerously limiting your coverage.
4. Lower utility costs
It takes less money to heat and cool a smaller home than a larger one. If your utility bills tend to be astronomical, downsizing is a great way to save money without having to go to the extreme of being stingy with heat or air conditioning when you need it.
5. Lower maintenance costs
Ongoing maintenance is a huge expense for homeowners, but it takes less money to maintain a smaller space than an expansive property. The result? Cost savings, but also, more free time in your schedule. And that's a win-win.
What could that extra money do for you?
Spending less money on mortgage payments, property taxes, insurance, utilities, and maintenance will leave you with more money left over to invest, whether in stocks, bonds, REITs, or actual real estate. In fact, if you were to downsize to a smaller home, your savings may suffice in allowing you to buy a second home, which you can use as an ongoing income stream by renting it out.
You may not feel the effects of downsizing too badly if you manage to find the right new space. Think about the areas of your home you spend the most time in, and aim to find a replacement property with smaller square footage on a whole, but enough square footage in the right areas. For example, if you're an avid cook, you may not want to downsize to a home with a smaller kitchen. And you don't necessarily have to. Rather, you can unload square footage in areas you care less about, like a living room on top of a family room or an office you never use.
Is downsizing the right move for you?
Downsizing is a great way to free up cash for other purposes. But before you assume it's the best move for you, consider the benefits of retaining a larger property. If you're able to make good use of the extra space you currently have but don’t need by converting part of your home into its own rental unit, you'll monetize that added square footage, thereby making your home more affordable and carving out money to invest elsewhere.
Ultimately, the extent to which you're attached to your larger home will likely play into your decision. But if your living space isn't particularly conducive to getting a tenant, and you're not torn up at the idea of moving, then downsizing could be a very wise financial move for you.
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