Your home is likely one of your most valuable financial assets. As retirement approaches, it may become more space and expense than you require. Many retirees opt to downsize by selling their larger home and moving into a smaller, more manageable, and less costly residence. This can release cash, reduce monthly expenses, and help extend your retirement funds.
Wondering how to finance this move? With American homeowners collectively holding around $48.2 trillion in home equity, the second-highest value in history, leveraging your home’s worth could help downsize with less financial strain. Learn how to access your home equity, who can benefit most from this approach, and what to consider before downsizing.
What does using home equity to downsize mean?
Home equity represents the variance between your home’s market value and your current mortgage balance. If you’ve owned your home for an extended period or paid off your mortgage, you likely possess a substantial amount of equity.
Downsizing enables you to convert this equity into cash. By selling your current home and moving into a smaller property, you can use the sale proceeds to purchase your next home outright or provide a significant down payment. This can reduce monthly expenses, free up funds for retirement, or cover living and healthcare costs.
However, selling your home isn’t the sole way to access equity. You could also opt for a home equity loan, HELOC, or a reverse mortgage if you are 62 years or older to fund the purchase of your downsized home.
Determine the amount of equity required to downsize
Before selling your home, it’s essential to calculate your equity and how far it can take you.
Step 1: Calculate your home equity
Subtract your remaining mortgage balance from your home’s current market value.
👉 For instance, if your home is valued at $400,000 and you owe $100,000 on your mortgage, your equity stands at $300,000.
Step 2: Estimate downsizing costs
Consider expenses like selling costs, moving expenses, and buying costs related to your downsized home.
Step 3: Determine how to utilize your equity
Whether purchasing outright, financing with a mortgage, or reserving some equity for other needs, understanding your financials upfront aids in effective planning.
Explore how to leverage home equity when downsizing
There are multiple ways to utilize your home’s value in retirement to transition to a smaller residence.
1. Sell your home and buy a smaller property outright
2. Utilize a HELOC or home equity loan before selling
Payment before selling
Best for: Individuals who require immediate cash upfront before their property is sold
Pros:
– Provides instant access to cash to aid in downsizing
– Generates temporary debt that must be repaid upon selling
3. Utilize a reverse mortgage to purchase a new residence
How it works: Homeowners aged 62 and older can utilize their equity to buy a smaller property without monthly mortgage payments through the Home Equity Conversion Mortgage.
Best for: Retirees on a fixed income seeking to downsize while maintaining cash flow
Pros:
– No monthly payments required
– Keeps more savings liquid
– Decreases home equity over time
– Involves eligibility criteria
– May exhaust all home equity by the time of sale, especially crucial if leaving an inheritance
4. Opt to sell and rent instead of buying
How it works: Sell your current property and rent a smaller dwelling, such as a house, apartment, or condo, instead of purchasing.
Best for: Individuals desiring more flexibility and reduced maintenance responsibilities
Pros:
– No property taxes, home repairs, or long-term commitments
– Potential rent increases over time
– Does not build equity in an asset
Further Information: Purchasing a new home post-retirement: Advantages, disadvantages, and considerations
Benefits of downsizing using home equity
Transitioning from a larger to a smaller property can offer various advantages:
– Reduced housing expenses, including property taxes, insurance, utilities, and maintenance costs
– Enhanced financial flexibility by unlocking equity for travel, healthcare, or retirement savings
– Reduced upkeep and maintenance burdens with a smaller property or condo
– Improved suitability for aging in place, such as single-story homes or retirement communities
– Debt reduction potential by paying off loans and lowering monthly expenses
– Potential tax benefits, such as capital gains tax exclusions
Drawbacks of downsizing using home equity
Downsizing through home equity entails certain risks, including:
– Market fluctuations affecting the property’s value
– Unforeseen expenses like closing costs, moving fees, property taxes, and HOA charges
– Emotional strain from leaving a cherished family home
– Challenges in finding an affordable, suitable property amid rising home prices
Quick Tips: Preventing downsizing regrets
– Plan in advance by researching the local housing market
– Budget meticulously, accounting for all potential costs
– Consider long-term needs when selecting a property
When not to downsize using home equity
While downsizing with home equity offers numerous benefits, it may not be advisable in certain situations.
Considerations for Downsizing Your Home
When contemplating downsizing your home, it’s essential to carefully assess various factors before making a decision. Here are some key points to reconsider:
1. Low Mortgage Rate: If you currently have a low mortgage rate, selling your home might result in acquiring a mortgage with a higher interest rate or monthly payment, especially depending on when you purchased your current property.
2. Affordability of a New Home: In certain real estate markets, smaller homes could be just as expensive as, if not more than, your current residence, making it challenging to find an affordable new property.
3. Emotional Readiness: Moving from a place you’re deeply attached to, both in terms of your home and community, can be emotionally challenging. If you’re not emotionally prepared to leave, the move may not feel worthwhile.
Given that downsizing is a significant decision, it’s crucial to carefully evaluate both financial and emotional aspects before proceeding with the transition. For more insights on downsizing and why it may not always be the best choice, check out our financial expert’s advice.
Explore our series on homebuying and home equity for more informative articles, including tips on building equity faster, using home equity for investments, qualifying for homebuyer assistance, and financing home improvements. Additionally, learn more about the considerations involved in downsizing and utilizing your home equity to support your lifestyle and financial goals by exploring our comprehensive guides.
FAQs about Downsizing and Home Equity:
1. Assessing Equity for Downsizing: Calculate your equity by subtracting your remaining mortgage balance from your home’s estimated value. If your equity doesn’t cover all expenses related to moving, consider a smaller mortgage for the difference.
2. Accessing Home Equity via Cash-Out Refinance: Yes, a cash-out refinance allows you to access cash from your home for renovations, debt consolidation, or educational expenses. Learn more about this option and compare it with home equity loans in our detailed guide.
3. Borrowing Against Home Equity: While some misconceptions exist, most lenders typically allow access to up to 80% or 85% of your home’s equity based on your credit score. Our guide debunks common myths surrounding home equity borrowing.
4. Age and Mortgage Approval: Lenders may inquire about your age during the application process; however, they cannot deny your application solely based on age. Learn more about mortgage approval guidelines, especially for retirees, in our informative guide.
To wrap up, while an appraisal is often required for home equity loans, it’s important to consider all these factors before embarking on the downsizing journey.
If you’ve recently purchased a home and have great credit, you may be eligible for a no-appraisal home equity loan, eliminating the need for a traditional appraisal to determine your home’s value. These loans utilize digital tools and hybrid models that analyze your home’s characteristics and recent sales in your neighborhood to establish its value. To explore this option, consider starting with specialized digital lenders and platforms like Lending Tree or Rocket Mortgage. Learn more about the process and expectations of no-appraisal home loans in our comprehensive guide.
If you’re not yet considering selling your home but require access to your home equity, alternatives such as a HELOC or home equity loan can provide cash without relinquishing ownership. Another option is a reverse mortgage for individuals aged 62 or older seeking to supplement retirement income without monthly payments, though understanding the associated risks is crucial.
When planning for retirement, enlisting the expertise of a financial advisor is often recommended. A financial advisor can assist in managing finances, projecting retirement spending, and potentially optimizing savings through market insights. Working with an advisor can offer reassurance and guidance, ensuring you’re on the right financial track as you approach retirement. Consult our guide on finding a reputable retirement advisor to kickstart your retirement planning journey.
Sources:
– Household Real Estate Value and Equity Retreat in 2024 Q3 but Remain Second Highest on Record, Realtor.com. Accessed March 31, 2025.
– Topic no. 701, Sale of your home, IRS. Accessed March 31, 2025.
About the Writer:
Cassidy Horton is a finance writer specializing in banking, insurance, lending, and debt repayment. Her financial expertise has been featured in prominent publications such as NerdWallet, Forbes, MarketWatch, CNN, USA Today, and more. Motivated by her personal finance journey of paying off $18,000 in debt within 10 months of earning an MBA, Cassidy is dedicated to empowering individuals to take control of their financial futures.
This article was edited by Kelly Suzan Waggoner. 📩 For feedback on this article or suggestions for future topics, please reach out to our team.
