Dealing with personal debt and drowning in credit cards is a tricky business no one wants to experience. One of the solutions for this kind of problem can be an aggressive debt payoff method or an elaborate debt management plan. However, if you own a home, there is one more option you might be overlooking – downsizing. Downsizing is something many homeowners opt for when it comes to reducing debt nowadays. It’s a more straightforward solution to financial problems, but it’s something you should get familiar with before committing to the process. So, if you’re thinking about downsizing your home to reduce debt, keep reading for some helpful information regarding the topic!
What does downsizing require?
Downsizing a house is a process that implies swapping your current home for a smaller or more affordable one. For example, you can downsize to a condo or townhouse, or relocate to a house similar to yours in a less expensive part of the city. If done smartly, downsizing your home to reduce debt can be a huge success. So, what will you need to do to make this plan work?
You’ll have to put your current home on the market and come up with enough funds to buy another, more affordable one. To make this two-step transaction easier, you’ll have to have a strong credit score and a low mortgage rate. This will help you get another mortgage for the new house and will ultimately lead to getting rid of debt altogether.
If you want to qualify for a mortgage loan, it’s preferable to have a credit score over 700. Additionally, if you have mortgage obligations for your current home and want to pay it off quickly, you’ll need a sufficient amount of home equity to cover all the expenses. They include selling your property, covering the down payment for the new house, and paying off your debt in full.
Obstacles to look out for when downsizing your home to reduce debt
Selling your current home and then buying a smaller property may seem simple, but it isn’t. It can be challenging to obtain a mortgage for a new property while your present mortgage is still active. You’ll need a good credit score and sufficient funds to convince the lender that you can undertake a second mortgage.
If you can’t meet these financial necessities, don’t despair! There is another solution to downsize your home and still reduce debt. You can always sell your current home first and then use that money for the down payment for the new one. Of course, don’t do this on your own; consult your financial advisor and real estate agent first! With their professional advice and the use of today’s technology, you can improve your finances and decrease debt.
However, you must prepare yourself for another common challenge. Many homeowners overprice their homes because they’re not aware of their actual value. You may need to downsize to a condo rather than a house if you want to reduce debt. So, before getting your hopes up, get a professional opinion about this and then start planning and budgeting.
Is smaller space always more affordable?
Not every kind of downsizing will reduce debt. You need to think smart, create a budget, and follow up on it to succeed. For example, if you do downsize to a smaller house but move to a neighborhood with a more expensive lifestyle and higher monthly utilities, you’re back to square one. That’s why you need to think about all these things before you actually move to a new place.
The fact is, if you downsize to a smaller place in an affordable neighborhood, your mortgage will probably be lower, you won’t have a massive bill for heating the house in the winter, and you won’t have as much maintenance. These are all perks of living in a smaller space. It’s cozier, and it brings families closer. As a plus, the fact you reduced your debt by downsizing will make you feel comfortable in your small home even more! You’ll be thankful for it, and so will be your bank account.
How much does downsizing cost?
Even though people are downsizing their homes to reduce debt, the sole process of downsizing is not cheap. That’s why you need to involve experts and take their advice regarding your finances and real estate.
Some of the main costs you can’t forget are taxes, legal fees, moving expenses, and remodeling. That’s why you have to find out the actual value of your current home, close the sale and then look for a smaller place that can fit into your new budget. Of course, if you paid off the majority of your current mortgage, you can focus more of your budget on reducing your debt. The important thing is to be aware of your finances at all times and not fall into the trap of adding more to your debt.
It’s time to make a plan for downsizing your home to reduce debt!
As you can see, downsizing can be quite good for your bank account, if not profitable. However, it’s not an easy process you can do on your own. That’s why you need a plan. So, here are some crucial points you have to consider when downsizing your home to reduce debt:
- Calculate all the numbers: before taking the first step, you have to know whether downsizing will be profitable and if you will be able to pay off your debt or not.
- Hire a professional financial advisor and real estate agent: in order to get an accurate picture of your financial situation and the value of your current home and the new one, you’ll have to consult experts; this way, you’ll know at the beginning what your opportunities are.
- Make your current home desirable for potential buyers: since you want to have the highest possible home equity, make sure to maximize its pros and minimize its cons.
Now that you learned everything about downsizing your home to reduce debt and you have a plan of action, it’s time to act. Finally! So, get a hold of your bank statements, contact the experts and start the process. Good luck!