TIME TO DOWNSIZE HOME?

Are you now or will you soon become Empty Nesters? With a glut of unsold houses on the market these days, it might be a good time to shop for a smaller home. Of course, having a glut of unsold houses on the market could mean you'll have a tough time selling your home. So, you might ask, what is there to gain? There is no easy answer, but you have to ask the questions. First, let's crunch some numbers to see if down-sizing makes financial sense. Bear in mind that the real-life results in every single case will differ from this one, depending on the state of the housing market in your current home town, the market in a town you might move to, and a lot more. This is just to show you a pattern for your own calculations---mainly to see how it will affect your cash flow, which in turn affects your life style. Let's say you've been in your current home for 20 years. You bought it for $300,000 with a $50,000 down payment, and a 30 year fixed rate (7%) mortgage for $250,000. Your monthly payments (interest and principal only) are $1,665. The home is now---realistically---worth $400,000, and you still owe $150,000 on the original mortgage. (What?! After making payments for 20 years on a $250,000 mortgage you still owe $150,000? Sorry, but those are the realities.) You can buy a smaller house or condo that will suit you quite nicely for $300,000. You can pay $50,000 down and get a 30 year fixed rate 7% mortgage, which means your monthly payments will remain the same---$1,665, which you can handle with no problem. You sell your present home for $400,000 and pay off the remaining balance on the mortgage of $150,000, leaving you with cash in hand of $250,000. Subtract from that the $50,000 you use as a down payment, and you're left with $200,000. Let's say you invest that $200,000 conservatively and get a 4% return (after taxes.) You're going to net $8,000 per year from that investment. That's cash in hand, to spend or reinvest as you like. What would you do with an extra $8,000 cash per year? Of course the variables are myriad, but we're trying to get a sense of your cash-flow position by making this move. Yes, you could get $200,000 out of your current home via a home equity loan (which you'd have to repay) or a reverse mortgage (which you don't have to repay, but could cost you $10,000 to $20,000 in upfront fees. More on reverse mortgages in later postings.) But remember, we're considering that you want to move. So no borrowing against your existing equity. Bottom line: this overly simplistic example shows you how your cash flow can increase by selling the old and buying the new. The variables are almost imponderable, but you've got to start with some kind of base from which to do further calculations. THE VALUE OF PEACE OF MIND If you wait, will you be able to sell your current home for more? Or for less? Will the price of the new house go up or down? Will interest rates change materially? Will you, some time down the road, decide that you really would rather have moved to a different city---to be near grandchildren, to have better weather, to have access to more amenities, whatever? These are all uncertainties, and no doubt you can think of even more. It sounds almost foolish to just say that life is full of uncertainties. What's it worth to eliminate perhaps one of the biggest uncertainties---where you'll be living---by down-sizing now instead of waiting for who-knows-what? You can't put a dollar value on eliminating uncertainties, like you can on the cash flow issue discussed earlier. Only you can determine what the peace of mind might be worth. If nothing else, hopefully this article will get your thinking underway on what for so many is a major life decision. You'll have to fill in the blanks---when, where, how much, etc.---but at least this can give you a format for your planning. You can get all the online calculators you'll ever need for your number crunching at http://www.calculator.com/. Note that that site has an abundance of advertising, maybe like a mine field, so proceed accordingly. I'm not recommending any of the advertisers. You're on your own in making those choices. This article supplements Chapter 18, pages 517-520 in Personal Finance. Access the textbook by clicking on the box in the right column.