Tags: house | downsizing | taxes | retirement | finances

5 Questions to Ask Yourself Before Downsizing

5 Questions to Ask Yourself Before Downsizing

By Tuesday, 09 March 2021 03:45 PM Current | Bio | Archive

Low interest rates and pent-up demand are making for a hot housing market so far in 2021. If you are heading toward retirement and planning to sell your home anyway, you may be wondering whether or not to take advantage of the seller’s market and list your home sooner than anticipated. But is it a good idea to sell now if you aren’t totally ready?

While the answer is nuanced, here are five questions to ask before deciding to list your home and move on to your next adventure.

What about my mortgage?

Not all mortgages are created equal. While some mortgages are portable, meaning you’ll have no financial ramifications for moving homes, others might come with prepayment penalties or discharge fees if you want to break your term early.

In a low-interest-rate environment, it could be tempting to consider downsizing and refinancing your mortgage at the same time. Just remember to consider the closing costs of a new home, the fees of a new mortgage and any prepayment penalties to understand whether it’s really financially worth it.

Is there enough supply?

Sales of single-family homes in December 2020 saw a 15.2% year-over-year increase. The housing market is competitive, which is great for sellers, but remember: Once you sell your home, you become a buyer. If you’re looking for a deal on a home heading into retirement, you might be hard-pressed to find one in this market.

Consider alternatives to buying a detached home that could be more cost effective. These could include living in an apartment, condo or senior living community. As you plan for your future, it’s important to choose a living situation you’ll feel comfortable in as you grow older so you can avoid additional moves. If the right living scenario isn’t available for you at the moment, you might not find it worth it to move.

Can I afford to prepare my home?

If you need to update your home to prepare it for the market, remodeling can get expensive. Whether it’s adding a master bedroom, which cost homeowners an average of $282,062 in 2020, or replacing a garage door, which cost $3,695 on average in the same year, making updates to your home requires upfront cash.

And it’s not always advisable to spend a lot of money updating your home before you sell it. That master suite addition, for example? Homeowners only recouped 51.6% of the cost in resale in 2020. Yet, depending on the age of your home, there could be some necessary improvements — especially if certain elements are not to code or would not pass a home inspection.

If you don’t quite have the funds right now, you could consider taking advantage of the historically low interest rates to borrow money to update your home. A home equity loan, for example, is particularly advantageous if you have good credit — a credit score of 740 can typically qualify you for strong rates. Remember, taking on more debt so close to retirement could add a financial burden at a time when you’re preparing to earn less.

How am I planning my taxes?

If you’ve lived in your home for several years and property values have risen, you’ll incur a capital gains tax when you sell. You could qualify to exclude $250,000 from the gain if you’re single or $500,000 if you’re married and filing jointly. However, if you’ve owned the home for less than two years, or if it hasn’t been your primary residence for at least two years in the five-year period before the sale date, you wouldn’t qualify for an exclusion.

If you don’t meet the threshold for the capital gains exclusion, you might want to consider holding off on selling your home until you can meet those requirements, if possible.

Do I need more retirement savings?

If the housing market is strong and you have built up considerable equity in your home, selling now could give you the chance to significantly boost your retirement savings in the event that you feel you haven’t yet saved enough.

However, you don’t necessarily have to sell your home to drive income for retirement. You could also consider becoming a landlord. If you have a lot of equity built up, or if you own your home outright, you could save money by turning your home into a rental unit. By renting a new home for less than what you’d be earning as a landlord, you could save extra funds for retirement while waiting for the best time in the market to sell.

Alternatively, you could buy a second home with a smaller mortgage that could be covered by your landlord earnings from your first home. Also, buying tends to be the more cost-effective approach if you plan to live in your area for longer than a year and five months.

Bottom line

Knowing the right time to downsize is never easy. Not only does the housing market play an important role, but many other considerations, including your own personal finances at the moment, also go into weighing the pros and cons of selling your home before heading into retirement.

Jolene Latimer has her master's in Specialized Journalism from the University of Southern California. She writes about personal finance, marketing and sports.

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Low interest rates and pent-up demand are making for a hot housing market so far in 2021. If you are heading toward retirement and planning to sell your home anyway, you may be wondering whether or not to take advantage of the seller's market and list your home sooner than...
house, downsizing, taxes, retirement, finances
Tuesday, 09 March 2021 03:45 PM
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