Can You Still Afford to Downsize?


Do you feel trapped in your mortgage right now? After all, if you move, your new mortgage would be much more expensive than the one you have right now.

Planning to downsize before or during retirement has been a time-honored tactic in the financial planning playbook. After all, it’s easy to point to home equity as a source of wealth that can be tapped when it’s time to finally live off your savings.

But is this retirement tactic still valid? The dizzying increase both in home values and mortgage interest rates mean that home affordability – no matter the size of the home – has decreased.

The Tried-and-True Strategy of Downsizing

Downsizing has long been a go-to tactic for many who are heading toward retirement. The idea is pretty straightforward: you sell your big, probably half-empty home, move into a smaller, more manageable one, and pocket the difference. Now that you’re liquid, it’s easier to turn that into a bigger monthly paycheck. And to boot, there’s even less house to vacuum and dust.

But here’s where the plot thickens. Near-zero interest rates during 2021 led to a wave of both refinancing and property purchases, driving up home prices. It was a perfect storm of supply and demand. So, while your current home may have appreciated, so has that downsized home in the quaint neighborhood you really like.

But that didn’t last forever. Interest rates started rising in 2022. That 30-year mortgage went from under 3% to over 7% awfully fast. So, housing affordability was dealt yet another blow now that higher financing costs were piled on top of inflated home values.

Will this mean that demand – and therefore prices – will drop? Who knows. But if you’re someone who is thinking about downsizing over the next few years, it makes pulling off the switch harder.

Downsizers today will likely have to pay premium prices for their desired, smaller homes. If you can take advantage of a higher sale prices of your current home, then it may net out.

But, if there’s a mortgage involved, higher rates may completely wipe out your cost savings.

A Blast from the Past

Let’s roll back the clock a bit for context. In 2021, rates on 30-year mortgages were hovering at historic lows — they even dipped below 2.7% for a while, according to the Federal Reserve Economic Data set. Who knew that we’d look at 2021 as the “good ol’ days” for anything, right?

But when we compare rates with the past, it’s easy to understand how much of an outlier they were. The average 30-year mortgage rate since 1971 stands at 7.74%. At the time I’m writing this, rates stand at 7.23%, so we’re slightly under the 50-year average.

By the way, the top mortgage rate in the Fed’s data set was 18.63% back in October 1981.

Well, at least the music was great in the 80s. Mortgages, not so much.

Running the Numbers

Sometimes you just have to do the math.

Let’s say that you’re looking to downsize to a $300,000 home. After a 20% down payment, you’ll have $240,000 left to finance.

Back in 2021, a 30-year fixed mortgage at 3% interest rate would give you a monthly payment of about $1,012. Not too bad, especially when you consider the cost of renting.

Fast forward to today, that same mortgage is now at 7.25%. That means your monthly payment now comes in at $1,637.

That’s right – that’s an extra $625 per month, a 62% increase. That’s a car payment. And it’s a big enough number to make people think twice about buying the same home they may have planned for just two years ago.

It also gives a little context around why, despite being fairly debt averse, I don’t necessarily encourage everyone to pay off their mortgage before retiring. If you refinanced at one of these low rates, it may make more sense to carry a fixed mortgage into retirement.

To Downsize or Not to Downsize?

So, if you’re planning to downsize in retirement, what should you do? This is where financial pundits start playing the guessing game about what Jerome Powell and the Fed are planning to do.

Will they hold rates higher for longer to tame inflation? Or will they eventually cave if there’s a recession or bear market?

Who knows. This is one of those externalities over which we have zero control. Part of finding peace of mind in the retirement planning process is to accept that so much is unknowable. Markets and economies are arguably mankind’s most complex creations.

We do our best with the information we have and go from there. That’s why financial planning is an ongoing, iterative process and not a one-time project.

With that in mind, you have to run the numbers when it makes sense for you. For instance, I don’t foresee Atlanta being home forever, but moving now isn’t an option. So, it makes no sense for me to stress about it right now.

But if you’re at a place where moving is an option, then updating your financial plan with a few downsizing scenarios is more important than ever.

Don’t let FOMO or fear of higher rates drive your actions.

And don’t let rising rates or inflated home prices get you down. Sure, mortgages are more expensive, but meaningful yields have returned to the bond market, too.

If you need help running these downsizing scenarios, then click here to set up a quick, complimentary introduction call to see if Prana Wealth is a good fit. We do still have the capacity to take on new clients.

As a fee-only financial advisor in Atlanta, we can (and do) work virtually with clients all across the U.S. and we’re here to help you when you’re ready.

Prana Wealth Management LLC (“Prana Wealth”) is a registered investment advisor offering advisory services in the State of Georgia and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Prana Wealth in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant to an applicable state exemption.
All written content on this site is for information purposes only. Opinions expressed herein are solely those of Prana Wealth, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant, or legal counsel prior to implementation.
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