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Selling Your Home

When to downsize is a tough call. Here's what to consider

Joe and Judy Powell photographed on their ranch in Texas.

Buff Strickland

Judy and Joe Powell sold their 20-acre cattle ranch in Texas to move to a nearby college town.

Judy and Joe Powell recently faced a decision most of us will eventually have to make: Should we sell our home and downsize to save money and effort, or hang on to the homestead because it's familiar and full of fond memories?

After mulling the choice for a couple of years, the Texas couple decided to sell their 20-acre cattle ranch to move to a nearby college town.

"We are the sole caretakers of this property. It's 24/7," says Judy, 69, who mows the pastures with a John Deere tractor while her husband, 71, tends the cattle. "Basically, we don't want to have to work this hard. We want time to play."

The Powells now have their sights set on a single-story house in nearby College Station, where, for a monthly fee, someone else will maintain the yard. What's more, they will be 30 minutes to an hour closer to their friends and doctors. The savings on gas alone will be more than a thousand dollars a year, Judy says.

Most of us aren't dealing with the rigors of running a ranch. But, like the Powells, many of us will discover at some point that our homes, though we love them, no longer suit our lifestyles, or that they are becoming labor-intensive money pits.

A recent Merrill Lynch survey of people's home choices in retirement found that a little more than half downsized and, like the Powells, were motivated by the reduction in monthly living costs and by shedding the burden of maintaining a larger home and property. Still, moving is not a decision easily made.

"The tie to one's home is the hardest thing to understand from the outside. It's a very personal decision," says Rodney Harrell, a housing expert with the AARP Public Policy Institute.

Some people may be reluctant to move from a house where they raised children and created decades of memories, he says. On the other hand, the cul-de-sac that provided a safe place for kids may be isolating if driving becomes a challenge.

A good way to begin the process of figuring out what's best for you is to "recognize the trade-offs," Harrell says. First, consider the house itself. Is it suitable for your needs, and will it allow you to age in place? Most homes can be easily modified to address safety and access issues, but location is also critical.

"How close are health facilities?" asks Geoff Sanzenbacher, a research economist with the Center for Retirement Research at Boston College. "Are things nearby, or do you have to drive?"

Even if your current home meets these age-friendly criteria, you need to consider whether it is eating up money that could be spent in better ways to meet your changing needs.

For example, the financial cushion provided by not having a mortgage can be quickly erased by rising utility costs, property taxes and homeowner's insurance. There is also the looming uncertainty of major repairs, which can cost thousands of dollars, such as a new roof and gutters, furnace or central air conditioner. A useful budgeting guide is to avoid spending more than 30 percent of your gross income on housing costs, says David Reiss, a professor at Brooklyn Law School who specializes in real estate finance.

"This isn't a hard-and-fast rule, but it does give a sense of how much money you need for other necessities of life, such as food, clothing and medical care, as well as for the aspects of life that give it pleasure and meaning — entertainment, travel and hobbies," Reiss says.

So if your housing expenses are higher than a third of your income or you're pouring your retirement income into your house with little money left to enjoy life, consider selling and moving to a smaller, less costly place.

Just as important, once you've made the decision, don't dawdle, Sanzenbacher says. The quicker you move, the faster you can invest the proceeds of the sale and start saving money on maintenance, insurance and taxes.

Take this example from BC's Center for Retirement Research: A homeowner sells her $250,000 house and buys a smaller one for $150,000. Annual expenses, such as utilities, taxes and insurance, typically amount to 3.25 percent of a home's value, so the move to the smaller home saves $3,250 a year right off the bat.

Moving and other associated costs would eat up an estimated $25,000 of profit from the sale, leaving $75,000 to be invested and tapped for income each year.

If all of this sounds good, your next decision is where to move. Your new location depends on any number of personal factors: climate; proximity to family and friends; preference for an urban, suburban or rural setting; tax rates; and access to medical care, among other considerations.

"You want to take an inventory of your desires and start to think, 'Do I have the resources to make that happen?' " Reiss says.

"It's not just a question of settling — it can be kind of an adventure," he adds. "It's an opportunity as much as it is necessarily driven by financial exigencies."

Sharon Dunivin, 70, decided to pull up roots, moving from her native Missouri to Henderson, Nevada, a year ago.

After her husband died in March 2012, Dunivin says she wasn't ready to make a move. But two years later, while weighing the pros and cons — including Missouri's harsh winters — she found the decision to move to suburban Las Vegas was easy, she says.

Her daughter, four grandchildren and great-grandson already lived there. Plus, "I felt like I needed to be closer to a metropolitan area, where health care is easier to obtain," rather than in rural Missouri where major hospitals are at least an hour away, Dunivin notes.

During her first year in Nevada, she rented a house, to ensure that the area and climate were good fits for her. They have been, and she recently purchased a low-maintenance single-story house a few miles from her daughter's home.

"I call it my final, last, forever move," she says.

Moving Forward With a Reverse Mortgage

If you are adamant about remaining in your house, one option is a reverse mortgage, which allows people 62 or older to stay in their homes while drawing on the equity they've built. They receive a lump-sum payment, line of credit or income stream without selling the property or making monthly payments. The loan is repaid when the owner moves, sells or dies.

But be aware that a reverse mortgage is a complicated loan that can be expensive, and today fewer homeowners may be able to take advantage of this option. That's because older homeowners are carrying more mortgage and home-equity-loan debt than in the past; and they may not have enough equity to qualify for a reverse mortgage, says Lori Trawinski, director of banking and finance with the AARP Public Policy Institute. Also, new lending rules issued by the government could make it tougher to qualify, she says. Lenders now must assess whether potential borrowers have the income to keep up with property taxes, homeowner's insurance and maintenance costs. —E.A.

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