Downsizing is often associated with moving into a smaller, less expensive home. But what if you could downsize to a more expensive property and still reduce your monthly housing costs? This hypothetical case study explores how homeowners might achieve this by leveraging the equity in their current home and taking advantage of an assumable mortgage with a lower interest rate.
Before we dive in let me reassure you that this isn't complex math, just some simple calculations that will have you saying, "Why didn’t I think of that?"
The Current Home
Built: 2006
Size: 2,923 sq. ft.
Bedrooms: 3 + Office
Bathrooms: 2.5
Garage: 3-car
Features: Bonus room on the second floor, pool with screened lanai, three-car garage.
In this scenario, the homeowners have lived in their spacious and well-appointed home for several years. While it has served them well, they are now considering a change. The maintenance, utility costs, and excess space have become less practical for their current lifestyle. They're interested in downsizing but are concerned about finding a home that meets their needs without increasing their monthly expenses.
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The New Home
Built: 2020
Size: 2,026 sq. ft.
Bedrooms: 3 + Office
Bathrooms: 2.5
Garage: 2-car
Features: Primary bedroom and en suite bathroom downstairs, guest bedrooms and bathroom upstairs.
The homeowners have identified a newer, smaller home in the same city. Although it is more expensive than their current home, it offers modern amenities, better energy efficiency, and a layout that fits their lifestyle. Importantly, this home comes with an assumable mortgage at a 3.25% interest rate—significantly lower than the current market rate of 6.5%.
Financial Strategy
Here's where the strategy gets interesting (and where the math gets downright delightful). The homeowners could sell their current home, purchased in 2009, and potentially net $380,000 after paying off the remaining mortgage balance, closing costs, and realtor commissions.
They decide to apply $330,000 of this equity towards the purchase of the new home, listed at $500,000. This reduces the new mortgage amount to $170,000. With the assumable mortgage at 3.25%, their new monthly mortgage payment would be $739.85—a significant reduction compared to their current payment.
The Power of the Assumable Mortgage
The key to making this downsizing scenario work is the assumable mortgage. If the homeowners had to take out a new mortgage at the current rate of 6.5%, the monthly payments would be considerably higher, making the move financially impractical. However, by assuming the existing mortgage at 3.25%, they lock in a lower rate, which significantly reduces their monthly costs.
Who knew that the key to financial happiness could be found in someone else’s mortgage?
Even though the new home has a higher purchase price, the homeowners would reduce their total monthly payment by over $170, thanks to the assumable mortgage. Additionally, the newer home’s energy efficiency would likely result in lower utility bills, offering further savings.
Who says you can’t have your cake and eat it too? With these numbers, you might even have room for dessert!
Conclusion
This hypothetical case study illustrates how homeowners can use the equity in their current home to downsize into a more expensive, yet more suitable, property while maintaining or even lowering their monthly housing costs. The crucial factor that makes this strategy work is the assumable mortgage with a lower interest rate, which allows for reduced payments despite the higher purchase price.
For those considering a similar move, it's essential to explore all financing options, particularly in today's environment of rising interest rates. By understanding the potential of equity and assumable mortgages, homeowners can make informed decisions that benefit both their lifestyle and finances.
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