Housing realities appear to contradict the popular belief that older homeowners can downsize a home to make the mortgage loan and living costs more affordable.
In today’s market moving into smaller living spaces may cost more, according to Go Banking Rates, a national website that helps borrowers shop for favorable interest rates based on information provided by more than 4,000 U.S. banks and credit unions.
Data show a significant number of older homeowners may consider that option. A recent survey by the Demand Institute found more than 40% of Americans from the age of 50 to 64 plan to save money by moving to a smaller home within the next five years so they can save money.
Data also show nearly half of all U.S. households lack the safety net needed to weather a financial emergency.
Despite strong signs of economic recovery, according to the 2013 Assets & Opportunity Scorecard published by the Corporation for Enterprise Development, the percentage of households poor in liquid assets—defined as the total of cash, bank accounts and other interest-earning assets, and equity in stocks, mutual funds or retirement accounts excluding equity in real estate—edged up to 43.9% this year.
In 2012 the poverty threshold for a family of four is at less than $5,763. Up to 132.1 million people of different ages who are liquid asset poor “are living on the brink of financial disaster,” CFED said.
Homeowners, particularly empty nesters and retirees who are liquid asset poor, and believe that downsizing helps reduce mortgage loans and living costs may be up for an unpleasant surprise.
Certified public accountant Sally Herigstad argues that findings from the Go Banking Rates report show that “downsizing” can cost a homeowner even more money than if they do not move.
“Unless a homeowner can cut total expenses by 25% or more, they shouldn't bother,” she said. Since by the time selling costs, including commissions, moving expenses, plus the costs of buying or renting a new home and buying furniture to go with it are factored in, the homeowner will not have more savings in the bank. Also, challenges associated with selling a residential property and potential sale losses due to still weak housing values, these homeowners, “might even be farther behind.”
Additional expenses associated with selling a home and buying a new home today can include new fees that are detailed in the report, Go Banking Rates said.
“Downsizing in the traditional sense may not always be the answer," says Go Banking Rates managing editor, Casey Bond. Empty nesters and retirees who want to cut their cost of living may and should consider renting as a more affordable alternative, and in the end, the most important step is to "do the math," he added.
