The Downsizing Dilemma. What To Do?
Downsizing has traditionally been a strategic option for retirees and pre-retirees, but real estate market experts are currently divided on what this trend will look like over the next few years. Seen as a blend of opportunity and challenge, many homeowners downsize to simplify their lifestyles, reduce upkeep, or adjust to their changing financial landscape. This trend (which I recently saw ridiculously referred to as a “silver tsunami of baby boomer downsizing”) is particularly challenging due to our current low-rate mortgage environment, which complicates the decisions around downsizing.
We thought we would delve into the complexities of downsizing amid these historically low mortgage rates, evaluate some of the lifestyle factors at play, and explore potential options for those of you considering this significant life change. I’ve recently been through this entire emotional process from beginning to end with my mom. For those of you who have never been a part of or witnessed this decision making process, buckle up — it can be wild, emotional, stressful, and very successful.
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The Low Rate Mortgage
Currently a defining feature of our financial landscape, these mortgages offer homeowners the ability to borrow at historically low rates. Characterized by significantly lower interest costs, the monthly financial burden on homeowners is drastically reduced. Historically, this type of rate is a result of monetary policy decisions by central banks looking to stimulate economic growth by making borrowing more accessible and more affordable. This resulted in an ability for many to buy a larger home or refinance for lower monthly mortgage payments.
The Lock-In Effect of These Low Rates
An unintended consequence of these low rates has been their “lock-in” effect. Homeowners are not willing to sell their current homes because they are unable to secure a similarly low mortgage rate on a new property. This creates both a financial and psychological barrier to downsizing as the increase in interest payments will offset the desired savings we usually see when moving to a smaller home. Initially, my mom did not want to take on downsizing due to this “lock-in effect” — if she was not going to be able to save a good bit of money, she was not going to move.
Homeowners who are locked in at ultra-low rates may face higher costs if they choose to downsize and secure a new mortgage at current rates — even if current rates are relatively low by historical standards. The lock-in effect often makes the hassles of downsizing seem not worth it.
Market Trends, Home Values and Capital Gains
The current real estate market further complicates the downsizing equation. In many areas, home prices have risen significantly, leading to a large increase in equity for many homeowners. This equity is a powerful asset for those looking to downsize, as it provides substantial financial flexibility. However, it can lead to capital gains and tax implications — so, it is wise to speak to a financial professional about this when evaluating your options.
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The Upcoming Changes to the Real Estate Commission Structure
The key potential change here centers around who will foot the bill for real estate agents representing the homebuyer. Under this change, the seller is no longer required to cover the commissions or fees for the buyer’s agent. This would allow homeowners looking to sell the ability to negotiate commissions or fees, as well as the ability to forgo paying the buyer’s agent fees. The goal for the seller would be to pay less in commissions and be able to make more money off the sale of the home.
There are already concerns being raised. Will the buyer need to make a lower offer to be able to pay their broker? Will the seller need to negotiate with the buyer’s agent in order to make the transaction work financially for the buyer? One of the goals was transparency in commission structure, and that will probably happen. The bottom line is: someone selling their home can now negotiate the commissions and fees related to the sale of their home. If this will lead to sizable savings for the seller remains to be seen.
Options in Downsizing
When weighing the options around downsizing, the good news is that there are a few paths to choose from:
Stay Put: If it is financially manageable and suits your lifestyle needs, staying in your current home is a popular option. This decision often stems from an emotional attachment to the home and the community as well as the cost savings of not moving. My mom chose this path until her home no longer met her lifestyle needs.
Downsize: A smaller home can be a smart financial and lifestyle choice, especially for those looking to reduce maintenance responsibilities or have a single-story floor plan. The key is to consider the financial implications due to a change in mortgage rates, the upcoming commission changes for the buyer, and the impact of possible capital gains.
Rent: If you are not ready to make a long-term housing commitment or if you want to see if a new location suits your lifestyle, renting does offer flexibility. It removes the burden of home maintenance and gives you time to adapt to life changes. But, keep in mind that, in some areas, rent prices are historically high.
Reverse mortgage: Homeowners 62 and older can convert a portion of their home equity into cash while retaining homeownership. The available funds can be a lump sum, fixed monthly payment, or line of credit — without the obligation of monthly mortgage payments. The balance of the loan is due when the home is sold or vacated. It is important to pay attention to the closing cost and interest rates when evaluating a reverse mortgage, as they can impact your equity over time.
Mortgage assumption: This option allows a buyer to take over the existing terms, payments, and interest rates of the original borrower (subject to lender approval). This could be attractive to heirs in this low rate mortgage environment — and, assuming an existing mortgage is often quicker, involves fewer closing costs, and has a lot less paperwork than obtaining a new mortgage.
The Choice Is Personal
The decision around downsizing — especially against the backdrop of low-rate mortgages and the upcoming changes in real estate commissions — requires a multifaceted analysis of financial, lifestyle, and market factors. While the lock-in effect of low-rate mortgages poses a unique challenge, the potential benefits of downsizing — whether for financial simplicity, lifestyle change, or preparation for the future — remain significant. Ultimately, the choice is personal.
P.S. If any of our readers are currently considering downsizing (or if you’ve been a part of the process in some way), let us know in the comment box below. We’d love to hear from you.
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