Financial Pros and Cons of Downsizing Your Home - Experian (2024)

Advantages of Downsizing Your Home

Choosing a smaller, more affordable home can leave you with more money for other financial goals, such as traveling, saving for retirement, building an emergency fund, paying off debt or paying children's college tuition. Downsizing your home can reduce your cost of living in several ways.

Smaller Mortgage

If you currently have a mortgage, the mortgage for a smaller home is likely to be less than you're paying now.

More Affordable Home Insurance

The size of your home affects your insurance premiums, with smaller homes generally being less costly to insure.

Less Maintenance

Bigger homes generally need more maintenance, simply because there are more things that can break. Moving to a property such as a condo with a small yard can eliminate the cost of paying a gardener or purchasing garden equipment to maintain the yard yourself.

Cheaper Utility Bills

Utility bills are usually lower in a smaller home, since there's less space to heat or cool. Eliminating a yard (and lawn) can significantly lower water bills, too.

Membership Savings

Downsize to a senior living community or condominium with amenities like a fitness center, swimming pool, tennis court, clubhouse and rooftop sun deck, and you won't have to pay for gym, club or pool memberships.

Fewer Auto Expenses

Move to a community that's walkable or has good public transportation and you might be able to give up your car—along with its maintenance, payments, insurance and fuel costs.

Lower Tax Bill

Because square footage is a factor in assessing a home's value for tax purposes, property taxes are generally lower for smaller homes. Consider moving to a state with lower or no income taxes, property taxes and sales taxes to save even more. Florida and Nevada are popular choices for downsizing retirees partly because neither has state income tax.

Profit From Possessions

You'll undoubtedly have to get rid of some belongings before downsizing. Depending on the amount and value of items, you could make a profit selling furniture, clothing and other possessions online or at a garage sale.

Disadvantages of Downsizing Your Home

Moving to a smaller home also has some potential downsides, including:

Mortgage Costs

If your current home is paid off, you might be able to sell it and buy a new home outright with the profits. Depending on the sale price of both homes, however, you might need to get a mortgage. Consider whether you want that additional expense.

Costs of Buying or Selling a Home

On average, selling a home costs more than $31,000, according to data from HomeLight. In addition to the costs of preparing the home for sale (such as new paint or flooring), you'll need to pay real estate agents' commission, closing fees and taxes. When buying your downsized home, be ready to pay closing costs—generally between 2% to 5% of the home's purchase price.

Moving Expenses

The cost of hiring movers can add up. You may also need (or want) new appliances, décor or furniture to fit the new space.

Potential Fees

Moving to a senior living community or condo complex could mean homeowners association (HOA) fees, maintenance fees and other expenses you don't have in your current home.

Possible Storage Costs

If your new home lacks space for sentimental items or heirlooms you can't part with, you'll need to pay for storage space to house them.

Limited Work-at-Home Options

Working remotely can open up a wider range of higher-paying jobs than you can find in your current community. A larger home with dedicated office space can make working remotely easier, potentially boosting your income. However, working from home may be difficult in a small home where your only "workspace" is the dining room table or a corner of the bedroom.

No Extra Space

Unused rooms in your current home could be rented out to make money—something you probably can't do in a smaller home.

Lifestyle Creep

Moving from a home in a quiet suburb to a condo in a bustling urban area is a dream for many. But easy access to shopping, restaurants and entertainment can tempt you to overspend until your new lifestyle eats up any savings from downsizing.

Renter Risks

Planning to sell your home and rent instead of buying? Keep in mind:

• You'll lose any mortgage tax deduction.
• You won't build equity.
• Rent increases could eventually price you out of your rental.

Factors to Consider Before Downsizing

Even if downsizing makes sense from a general financial perspective, you'll want to consider current market conditions, your life stage and other factors before you make the move. Here are some things to think about.

• How diversified are your assets? Selling your home and paying cash for a smaller home can eliminate the need for a mortgage. But tying up too much of your net worth in your home's value could be risky if home values plummet. Even if you can afford to pay cash for your downsized home, diversifying more of your assets into investments such as stocks and your retirement funds may make more financial sense.
• Are there less drastic ways to boost your income? If your home is paid off and you don't have heirs to leave it to, a reverse mortgage could generate extra cash without leaving your home. Or, you could pick up a side gig to give you a little more budget breathing room.
• What about the kids? Multigenerational living is popular. More than half (52%) of Americans aged 18 to 29 lived at home in 2020, Pew Research Center reports. A larger home can offer options, like having adult children live with you and share expenses, that a smaller home doesn't. You can also build an accessory dwelling unit (ADU) on a larger property. Your adult children could live there, or you could live there as you age while your child and their family enjoy the primary house.