Downsizing is a wonderful way to simplify your life in retirement and focus on the things that matter to you. While the process can be challenging, one of the biggest hurdles you’ll face along the way is deciding what to do with your current home. Here are some important questions to consider as you decide whether or not to sell your most valuable possession.
If you decide not to sell your current home, will you still be able to afford your new one? According to Bankrate, mortgage rates for second homes tend to be higher than those for first homes. Even if you can afford the down payment and higher mortgage, there are other expenses to account for. Buying a second home means paying property taxes, home insurance, maintenance fees, and utilities on two houses at the same time.
Based on these expenses, find out what you can afford for your new home. Determine your budget for your downsized home before you go house-hunting so you can avoid falling for a great place that’s too pricey. You can use online calculators from websites like Redfin to determine your home affordability based on key factors like your annual income, monthly spending, and down payment.
It’s also important to estimate your current home value before deciding to sell. If you’re not happy with your home value, you may want to hold onto the property and wait for an upswing in your local housing market. Before deciding to wait it out, HomeLight recommends assessing your market carefully and reviewing local price trends.
If you intend to sell your home eventually, be careful not to wait too long. Plan to sell your home within the next 3 years to avoid paying capital gains tax on your sale profits. During this period, you can still claim the home as your primary residence and exclude $250,000—or $500,000 if you’re married—of capital gains from your sale. If your home has increased in value significantly since you bought it, this can save you tens of thousands in taxes.
Renting your home may be a good way to cover the ongoing costs of your current home if you intend to keep it in the family, but it may not be profitable. Calculate your monthly expenses against the amount of rental income you expect to earn to find out if you can make money by renting out your home. Remember to account for various costs associated with renting, like home maintenance and property management fees—these can really cut into your profits.
Many seniors find that a move to assisted living is their best option and that the proceeds they gain from renting out their home can help offset these costs. A move to assisted living can help you maintain some of your independence while still receiving help with daily activities like housekeeping and meal preparation. Keep in mind that even though the median annual cost of assisted living in North Carolina is $66,000, there are many types of facilities available with a wide variety of price points.
Whether or not you want to be a landlord may be more important than the profitability of renting out your home. Managing a rental can be very stressful and time-consuming, so it may interfere with your retirement plans. If you’re downsizing to a house far away, you’ll have to make a plan to manage it long-distance. Remember that you can always hire a property manager to handle your landlord tasks, such as finding tenants, collecting rent, and coordinating maintenance.
You might decide to hold onto your home if you plan on moving back into the area in the future. Perhaps this is where your family is, and you will rely on them for care during your later years. Or maybe you’re just not sure that downsizing is right for you. Selling your home and buying a new one down the line will likely cost you much more than keeping it while you’re living elsewhere. In the meantime, consider leaving your home in the care of a family member. This way, you can still use the space for all of your family gatherings!
When it comes to downsizing, the decisions you face are largely personal. Think ahead and consider what you want your life to look like in the future. The best choice will depend on what matters the most to you, whether this means cashing in by selling your home now or renting it out long-term to keep it in the family.
Author- Jim Vogel