Are you among the millions of Americans that sacrifice just to keep up with your housing payments? When do you call it quits? In other words, how do you know when enough is enough? While it could be a tough decision to downsize, it’s often the best decision homeowners make.
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Keep reading to learn when you should sell your home and buy a cheaper one.
What is Your Housing Ratio?
First, take a look at your
housing ratio. This is the comparison of your mortgage to your gross monthly income. In an ideal world, it should not exceed 30% of your gross monthly income. Here’s how that works.
Let’s say you make $8,000 a month in gross income. Your total mortgage payment shouldn’t exceed $2,400. That includes principal, interest, real estate taxes, homeowner’s insurance, HOA dues, and mortgage insurance. If your mortgage payment is higher than that, it could be the first sign that you should look elsewhere.
Of course, there are many factors that play into this decision. If your housing payment does cost more than 30% of your gross monthly income it doesn’t mean you have to downsize, but it could be an indication that you should start considering it.
You Can’t Save an Emergency Fund
Do you have money set aside for emergencies? A good start is to save $1,000, but ideally, you should have three to six months’ of income saved. If you don’t and an emergency creeps up, it could cause financial destruction.
Even if your housing payment is less than 30% of your gross monthly income, you might find it hard to save. You have to figure in your other costs, such as house maintenance and upkeep plus the cost of daily living. Maybe your utility bills take over a good chunk of your income or the home is old and constantly needs repairs.
Whatever the reason may be, you need that emergency fund. If you don’t have it, this could be even further reason to consider downsizing.
You Have Too Much Space
How much space in your home do you actually use? Are there rooms in the home you never use? You might be able to save money by buying a home that only has the space you require. For example, are there more bedrooms than your family fills up? You might be able to save money by
buying a home with fewer bedrooms.
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Bedrooms aren’t the only areas you might not use, though. Think about areas like the living room and dining room. How often do you entertain and use them? Could you save money by buying a home that has a great room rather than separate rooms?
It’s food for thought as you figure out if you should downsize your home.
The Maintenance is Too Much
If you bought an older home, or you have been in your home for a long time, the cost to keep up the home might get high. On average, homeowners spend 1% of the home’s value on regular maintenance. When things start breaking and need repairs, though, that percentage can climb to as much as 4% of the home’s value.
If you find yourself constantly charging the expenses or scrambling to find ways to pay for them, it may be easier to move. Take an inventory of what you spend on your home’s maintenance over the last few years. Then consider how much longer you plan to stay in the home. Does it make sense to
keep fixing it up or is it easier to sell the home and move to something smaller and that requires less maintenance?
The Property Taxes are Too High
Finally, there is the issue of the property taxes. Have they climbed in your area recently? Are the taxes unaffordable? If so, it might not be a bad idea to move into an area with cheaper taxes. Even just buying a cheaper home (a home worth less) will help you lower your tax bill.
Making the decision to sell your home and buy something smaller and/or cheaper isn’t an easy decision, but it could be the right one. Be honest with yourself. Are the property taxes out of control? Can you keep up with the home’s maintenance? Are you okay with your housing payment each month?
If you answer these questions honestly, you’ll be able to determine what you should do moving forward. Buying a cheaper home doesn’t mean you’ve failed – it means you are making a smart decision for your finances.
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