Downsizing into a smaller home has been a rite of passage almost exclusively for empty-nesters and retirees. But as home prices and mortgage rates rise and the inventory of homes for sale shrinks, younger generations might find upsides to downsizing earlier in life.
If you don’t need a bigger home, downsizing earlier could work in your favor. Here are three reasons why:
1. You’ll free up money for other financial goals. If you have a bigger home, much of your income is tied up in monthly mortgage payments. By getting a smaller, more affordable place, you could free up cash to put to work toward other goals such as college savings or retirement, says Tyler Whitman, a real estate agent with TripleMint in New York City.
2. You could move into a better neighborhood. Most homeowners (whether they have kids or not) want to live in a desirable neighborhood where they can put down roots, says Jessica Lautz, managing director of survey research and communications with the National Association of Realtors based in Washington, D.C. Choosing a smaller place in a sought-after area over more space elsewhere is a trade-off with a lot of potential upside: better schools, increased walkability, more charm or lower crime, Lautz says.
3. You’ll simplify your life. A bigger home comes with more maintenance, costs and potential wasted space — all things you might not have anticipated. This is especially true if you’re now going through a major life event such as a divorce, illness or job change. In addition to less upkeep, downsizing can also provide financial peace of mind if you feel suffocated by your mortgage payments and other debts, Whitman adds.
“Some people are afraid of debt. They don’t mind living a simpler life to pay their home off faster and gain the confidence and comfort of being debt-free,” Whitman says.
Keep in mind that a smaller home won’t always be cheaper, depending on your market, Lautz says. For instance, if you’re downsizing across town in St. Louis, you’ll likely save money. But if you’re moving from a 3,000-square-foot home in Dallas to a 1,200-square-foot townhome in Seattle, you might break even or possibly pay more.
Before you consider downsizing, make sure you’ve been in your current home long enough to recoup closing cost, or ensure you have enough equity for your next home purchase, Whitman says.
Work with a mortgage lender to figure out how much money you’ll gain from your current home sale and what the savings might look like if you downsize to a smaller and (hopefully) more affordable home.