According to a 2023 report from investment firm Vanguard, around 25% of Americans aged 60 and older could potentially relocate to a less expensive housing market and use the equity from their homes to boost their retirement savings, making retirement more secure and enjoyable.
People with homes valued close to the national median could have gained an average of $99,000 in equity in 2019. Meanwhile, those in high-priced markets could have gained an impressive average of $346,000.
Matthew Gottshall, a certified financial planner in Westlake, Ohio, notes that housing prices are at an all-time high. This has led more people to consider downsizing and taking advantage of the increased equity in their homes.
Here are the steps to consider when contemplating this option.
ASSESS THE MARKET
Selling your home and downsizing to pocket the equity is a good strategy in a market where it's feasible. This is easier in more expensive housing areas, where you may be able to exchange your high-value home for a smaller place in a more affordable market. Vanguard’s analysis found that relocators in California had more success in clearing equity in their homes than those in lower-priced markets like New Mexico and Texas.
Selling property is not always an easy task, as noted by Andrew Herzog, a CFP in Plano, Texas. Just because you want a certain amount for your home doesn't mean the market will comply. You may be ready to move, but if no one wants to buy your place, you won't have any luck.
It's also important to ensure you can afford to buy a new home that you like. Check home prices in your desired location before putting the “For Sale” sign out.
“My parents’ house has increased substantially in value, but the places they want to move into have increased even faster,” Gottshall explains.
RESEARCH THE COSTS
It's essential to understand property taxes and the basic living costs in your desired area, as well as the costs of selling your home. Keep in mind that real estate agent commission is typically about 5.5%. If you're getting a mortgage for the new home, there will be closing costs, and rates are likely higher than when you last purchased property. All these expenses could eat into your net sale profit.
“We’re at a place where 30-year mortgages are at 6.5% to 7%,” Gottshall says. “It could very well mean your monthly payment on a much lower-priced house is almost equivalent to the home that you’re in right now.”
In an area with a very low cost of living, do some research to understand what to expect from the municipality. Are the streets and sidewalks maintained? How is garbage collected? Is the fire department responsive?
Ralph Bender, a CFP in Temecula, California, shares the story of a client who had a beautiful home on the Mississippi Gulf Coast. Although the taxes were minimal, the client noted that there were also no services available.
CONSIDER THE CURRENT COST OF MAINTENANCE
Deciding to keep your house means dealing with tasks like maintaining a large yard, replacing an old roof, and managing a second-story primary bedroom as you get older. Selling the house gives you the opportunity to reduce your responsibilities and search for a place that is easier to live in as you age.
“You have people with these four- and five-bedroom houses that no longer have kids staying with them,” Gottshall says. Moving to a home with less to clean and fewer stairs can make it easier to stay in your home long term.
CONSIDER YOUR FAMILY CIRCUMSTANCES
It's not necessary to move closer to loved ones, but it can be beneficial. Bender shares the story of a client who moved with his wife to South Carolina because they enjoyed golfing. After the client passed away, his wife returned to California because she didn't have connections in the area.
“There’s got to be a support network for the family,” Bender says. A community, he says, encourages social participation and contributes to overall longevity.
EVALUATE THE LOCATION
If you’re buying in a new city, visit during every season to ensure you like the area year-round, even in harsh weather like snow or extreme heat. If possible, spend a vacation there.
“Every area has its negatives,” Bender says. “You have to find out what they are before you move there and be prepared to deal with them.”
Hazel Secco, a CFP in Hoboken, New Jersey, remembers clients who moved from New Jersey to North Carolina and found that the lifestyle wasn’t what they expected. “I think they were visualizing and thinking about the difference theoretically, but I don’t think they fully grasped the implications,” Secco says. “They had to come back after selling the North Carolina (house), so it just ended up costing so much more.”
