We Moved Into a Smaller House to Pay Off Debt. Here’s How We Did It.

Three years ago our family of 5 decided that moving into a smaller house to pay off debt and start to save money. For us, it was the right thing to do. Our marriage was suffering and we were sick and tired of living the paycheck to paycheck life. Truth be told, downsizing to a smaller house might not be the right answer for everyone. So how do you know if it’s right for you and what can you do to get started?

Mortgage = 25% of your income

A crazy thing happens every day and no one is talking about it. People apply for a mortgage loan and they get approved for a price way above what they should be paying.

On top of that, many young couples get swept away by the fun of house shopping and tend to work their way up to the higher end of their loan amount.

What people don’t tell you is that your mortgage should be around 25% of your take-home pay. That means:

Take home pay x .25 = Monthly mortgage payment

If you find yourself paying more than 25% of your take-home pay toward your monthly mortgage payment, it is definitely a sign that you should consider moving into a smaller house to save money.

Mortgage calculator

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Debt freedom is a trend that is on the rise and many people are taking to moving into a smaller house to save money and pay off debt. Here's how to do it.
Purchasing a smaller house to pay off debt is possible. It just requires a little planning.

Know what your house is worth

Before putting your house on the market, it’s important that you take into account what your potential profit might be. Zillow is a great option when you are looking to get an estimate for what your house might be worth.

Just type in your address and you’ll see the full purchase history and a list of local houses that have sold recently near you. Zillow uses this information to give you an estimate of your home’s value.

Keep in mind that if you have made updates or additions to your home, there is a chance that its value has gone up more than Zillow knows.

Because you will want to have a significant down payment (20% is recommended) when moving into a smaller home, it’s important that you make sure selling your house will be profitable enough to benefit you.

Other costs to consider

Keep in mind that besides a 20% down payment, you’ll be paying a realtor around 3% plus closing costs.

Don’t forget to take into account the moving costs, an appraisal on the new house and any updates or purchases you’ll need to make.

What if selling won’t turn a profit?

If selling your home will not give you a significant enough payout to help you purchase a smaller home to pay off debt, there are other options to consider.

Renting or hosting your home

You know your home is too expensive, and that reducing the mortgage cost could significantly help you pay off debt, but selling it won’t get you anywhere. If that’s the case, many families will move in with family for a year while renting their home.

If you don’t have family to live with, you could always consider trying a home-hosting site like Airbnb that allows you to host your entire home or even just a room. To see how much people are charging in your area, check out the Airbnb calculator.

Debt freedom is a trend that is on the rise and many people are taking to moving into a smaller house to save money and pay off debt. Here's how to do it.
Your best bet for owning a smaller home to pay off debt is to get as much money as you can from your current home.

How much house can you afford?

Once you’ve figured out your profit potential and whether or not selling your house is a wise choice, it’s time to start looking at how big of a mortgage you can afford.

Using a mortgage calculator is one of the best ways to get a visual idea of how much house you can/want to afford.

Tips for calculating your mortgage:

  • Aim for 20% down payment
  • Don’t believe what they say you can afford
  • Try to keep your debt to income ratio at 25% or lower

Even at 25% our family’s suggested monthly payment is $700 more expensive than our current mortgage. Remember, you want a smaller home to pay off debt. The cost of your monthly mortgage payment will have a direct effect on how much debt you are able to pay off.

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Consider investing in a foreclosure

To cut back on the costs of your mortgage while still potentially getting a slightly larger home, looking into potential foreclosures is always a good option.

Browsing foreclosures near you can help you cut back costs and offers you the opportunity to make improvements and potentially sell the home in a few years at a large profit.

Pay off debt

Any profits you make beyond 20% would be wise to use in helping to pay off your other debts. From there, I recommend following Dave Ramsey’s 7 Baby Steps to help with debt payoff, saving money and building wealth.

Don’t let the prep work overwhelm you. I promise downing to a smaller home to pay off debt is possible. After just 3 years my family and I were able to completely knock out our debt and finally begin living the life we have always dreamed about.

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Debt freedom is a trend that is on the rise and many people are taking to moving into a smaller house to save money and pay off debt. Here's how to do it.