Trading Spaces: When Does It Make Sense to Buy a Smaller House?

May 26, 2010

Dear Carrie,

Should we downsize to a smaller house now or wait? We have very little equity. My husband will retire in 3 years and he has lost money in retirement savings.

—A Reader

Dear Reader,

The turmoil in the real estate market over the past few years has forced many people to look at what may be their biggest asset—their home—in a different light. In many parts of the country, personal real estate has been transformed from an investment back into its primary function: housing. So I'm glad you asked your question about downsizing. If you're feeling financially constrained—and given the fact that housing is such a big item in every family's budget—it makes sense to see if you can reduce your monthly expenses by trading down.

The way to look at this situation, then, is to figure out what your real estate options are and then crunch the numbers to see what you'll save by selling and buying a smaller place or renting. Here are some things to consider:

  • What will your current house sell for? You probably have a good sense of this already since you mention you have little equity, but it makes sense to start by figuring out what you can get for your current house. Be realistic, if not conservative. When you go through this type of analysis it's almost always a good idea to enlist the help of an experienced local real estate agent, and to take a careful look at recent sales of comparable properties.
  • What's the true cost of owning your current home? Your mortgage payment is probably the biggest chunk of your monthly housing costs, but don't forget about the other expenses of home ownership: insurance, property tax, utilities, and maintenance. A smaller home could save money on every front, so to make an informed decision, really understand these numbers. As an example, if you're currently spending $3,000 a month on your house, and a smaller house would cut that by $200, it's probably not worth your while, especially given the cost of selling and moving (see next bullet). But if you could lower your housing expense by $1,000 a month, that's a lot of money you could start putting in the bank.
  • What costs will you incur by selling and moving? It's expensive to sell a home and buy a new one. You'll incur brokerage commissions on the sale of your existing house (typically 6 percent; on a $200,000 house, that's $12,000). Your local jurisdiction may impose a transfer tax on the sale. And this doesn't sound likely, but if you had significant equity, you might have to pay a capital gains tax. And finally, don't forget moving expenses. These one-time expenses could eat up a lot of your monthly savings, so ask yourself: Is it worth doing?
  • How much house do you need? Obviously, before you act, you need to have a good sense of how much house you need so you can see what's available in your area, to buy or rent. 
There is one more subjective consideration: many people find they like having less house to care for as they get older. A smaller place, a condominium, or even a rental may free you and your husband to spend more time on other things you love! (Don't overlook renting; in some markets, rentals are very favorably priced relative to home ownership.)

Finally, what will you do with the money you save? It sounds as if you're concerned about retirement—so consider earmarking most of the savings for your IRAs, Roth IRAs, or 401(k)s. Remember, if you're over 50, you can make additional, "catch-up" contributions to these plans. Good luck!

Important Disclosure

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The type of securities and investment strategies mentioned may not be suitable for everyone. Each investor needs to review a security transaction and investment strategy for his or her own particular situation. Data contained here is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.


The information on this website is for educational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager.


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