When we downsized our house a little over 2 years ago we also did it with the desire to begin living a more intentional life and get out of debt. Downsizing for us also meant upsizing our money. If you are feeling house poor or like you are drowning in debt, I want to walk you through how you can downsize your house to get out of debt and how to decide if it is the right move for you and your family.
*This post may contain affiliate links. I may make a commission off anything I recommend but all opinions are my own.
Are you paying too much for your current house?
Before you jump the gun and assume that selling your house to pay off debt is the right solution, make sure you really analyze where you’re at. In some cases, it might not be your mortgage expense that is holding you back.
How much should you spend on your mortgage?
There are some basic budgeting guidelines you can follow to determine if you would benefit from downsizing your house.
Things to consider:
- Are you spending more than 30% per month on house costs?
- How much more?
- What price do you need to be at to be spending 30% or less?
How to calculate your housing costs
Taking the time to figure out percentages can be frustrating. The easiest way to do it is to take your monthly pay and multiply it by .25. This will give you the total amount you should be spending each month on your mortgage.
Ex: 4,000 (take home pay) x .25 = $1,000 (Amount spent on mortgage).
Is your house a waste of your time?
Sure, downsizing a house to pay off debt can have huge financial benefits, but don’t ever underestimate the value of your time.
Time is a precious resource that we can never get back and too many people are spending it tending to their houses. On top of calculating your monthly cost, do a quick evaluation of how much time you put into your house each month.
Calculating your time
- How much time do you spend a week cleaning/maintaining your home?
- Mowing the lawn
- Fixing things
- Replacing filters
- Do you pay additional funds for a service like cleaning or yard work? (Be sure to consider these costs in your house budget).
Make a Bucket List
Don’t let me give you the impression that you shouldn’t be mowing your lawn or taking care of a house that you call home. Valuing the things we have is so important.
But let me ask you, what do you want most from your life? What would you put on your Bucket List?.
- Financial freedom
Do the items on your list benefit from you putting time and energy into maintaining your house? I’m a firm believer that modeling your life and finances around your biggest life goals is one of the best ways to live. In fact, this is the entire basis for The Bucket List Budget financial course.
Know the current market
How are houses selling in your area?
Is it a buyer’s market or a seller’s market?
What is the average cost of purchasing a home right now?
Before you decide that downsizing to get out of debt is the right option, you have got to know if it’s an option in your particular area.
How do you learn about the housing market?
Zillow.com is one of the best ways to get a feel for what is selling around you. Plus, by typing in your address, Zillow will give you an estimate as to how much your current home might sell for.
Is smaller actually more affordable?
In some cases, due to inflation, the cost of a smaller home may be the same price you paid for yours 10 years ago. If this is the case, you might find yourself in a bit of a pinch.
Downsizing to pay off debt isn’t going to work if you get a smaller house but your payment stays the same.
That’s why it’s important to have an idea of how much money you actually stand to make on the sale of your current home.
How much money will you make when you sell your house?
Again, using Zillow to get an idea of how much your house will sell for is your best bet.
Just enter your address in and you can see what your house as previously sold for and what it is estimated to be worth today.
Is Zillow always accurate?
While Zillow is usually a great starting point, keep in mind Zillow doesn’ actually know the current state of your home.
Have you made upgrades?
Has your house undergone serious damages?
All of these things are going to affect how much you can make on the sale of your house.
Other posts you’ll love:
- The Downsides of Small House Living with a Family
- We Moved Into a Smaller House to Pay Off Debt. Here’s How.
- Work Alone Side Jobs That Pay Your Mortgage
Do you have a good ROI?
Once you have an idea of how much you can earn on the sale of your house, will these earnings be enough to cover a significant downpayment on your new home? Read 6 Reasons to Love a 20% Downpayment
Having a significant downpayment when you downsize will help to drastically lower the cost of your monthly mortgage payments which is why it is so important.
What do you currently owe on your mortgage?
In order to do this math correctly, you need to know what you currently owe on your mortgage.
This way you can get a better idea of how much money you will actually be making from the sale of your home.
Don’t forget the cost of realtor fees!
Often times people will see that their home is worth $80,000 more than the current amount of their mortgage loan.
Do not assume that you will see all of this $80,000!
When it comes to buying and selling houses, it is crucial to have a professional on your side.
What fees do you pay when selling your house?
All of the fees that go along with buying a new home or selling your house can be crazy confusing. Here is a guide to who pays what.
Should you sell without a realtor?
Sometimes the idea of selling your home without a realtor is tempting because you could save thousands of dollars. However, the amount of legal work proves to be overwhelming for most.
Can you stay in your home and reduce your expenses?
In some cases, it might not make sense to downsize your home to pay off debt because downsizing won’t really save you much money.
Another option to look into is refinancing your current home. This can be especially beneficial if your current interest rate is higher than the national average. Check today’s current mortgage rates.
Refinancing your home could help you save money each month and lower the amount you pay in interest but, there may be additional charges to go along with it.
That’s why it’s important to make sure you are asking questions and you know what you’re getting into before you decide to refinance.
Can you pay off your home instead?
With LendingTree online, you can get help deciding whether lowing your monthly payments is beneficial, or you can discuss the potential of paying your mortgage off quicker!
Reduce debt when you downsize
Another great idea if you do plan on downsizing your house to pay off debt is to find ways to make money during your downsize that you can put toward your debt.
How to make money during a downsize
- Estate or moving sale
- Sell on Facebook Marketplace (seriously, stuff sells so fast)
- Used book stores
- If all else fails…donate, donate, donate!
What to do from here
Once you have downsized and have started paying off your debt the next steps should be:
- Keep paying off debt
- Don’t accumulate more
- Create a spending plan that works
It can be a long, hard road, but it is also really liberating to pay off your debts one step at a time! Finding a spending plan that allows you to pay off debt, save money, and still enjoy your life is one of the smartest moves you can make. Click here to check out The Bucket List Budget.