Many people consider their home to be their greatest asset and it is, however, it can also be your greatest expense. If the bulk of your existing budget goes towards the upkeep of your property, it may be a good idea to think about downsizing.
If you're uncertain about taking the plunge and downsizing, consider the numerous reasons why it could be the best decision for you, with financial gains topping the list.
To estimate how much you’ll be able to realistically save with downsizing, take the following financial considerations into account.
1. What Are My Financial Requirements for Retirement?
Depending on your situation, you may be retired or nearing retirement. Consider your financial needs and meet with a financial advisor as they have the knowledge and experience to help you determine what size of “nest egg” you need to support the lifestyle you want. If your proposed nest egg is larger than expected, downsizing could be the solution for your retirement budget needs.
2. What is the Current Value of My Home?
If you don't know, check with a few builders to get a sense of the market, or contact a Realtor for a free market value estimate. They’ll be more than happy to provide you with this type of information since you might become a new client of theirs if you decide to list your home!
Request a written evaluation which includes recently sold comparable homes so you can verify they've researched properties in your area and are giving you an accurate number. Keep in mind that this is just an estimate and the actual closing price could fluctuate based on when you list your home, how well it is showcased, and a number of other factors.
3. How Much Will My Agent Costs Be?
While real estate agent fees somewhat vary, you may be able to negotiate a price with them as you finalize your contract. Typical fees start at 7% on the first $100,000 of your home and 3% on anything above that. The commission is split equally between the listing and selling agents if it comes to that.
For example, using the structure we just laid out, for a $450,000 home in Calgary the commission would be $7,000 for the first $100,000 and $10,500 for the remainder for a total of $17,500. That total would be split between the buyer and seller agents.
4. Will I Be Responsible for Any Taxes After I Sell?
The nice thing here is that any earnings you receive from selling your home, as long as it was your principal residence, are tax-free, which means more money for your bank account.
For instance, assuming your current paid-off home sells at closing for $450,000, all of that money is free from tax and ready for you to reinvest into a new home.
5. How Much Will I Need to Pay for Closing Costs?
Assuming you don't have to pay any penalties for breaking a mortgage agreement, your main closing cost will be legal fees, which are usually around $1,500. More information on real estate lawyers and their role in closing on your home can be found here.
6. What About Moving Expenses?
This is somewhat difficult to estimate since it's dependent on a lot of variables (how much furniture you have, whether you're renting a self-haul truck or hiring movers, how long you need to rent the vehicle if you do it yourself, etc.). You'll want to allot yourself at least $1,000 for this expense.
7. Will I Need to Plan for Other Expenses?
It is possible that when downsizing your home your furniture may also need to be scaled down. Although that eight-person dining room set worked in your old home, it might not fit in your new place so take this opportunity to sell/donate your old furniture and "update" your look. Check out these dining room sets, where the table and chairs sit a little higher and you can tuck the stools right under the table for space-saving efficiency.
With these considerations in mind, you're now ready to downsize from your current home to a newer place that better fits your current needs, affords you more and enhances your current lifestyle.