Have Too Large a Home? Here's Why Renting Part of It Out Could Make More Sense Than Downsizing

Home buyers are often cautioned to do their best not to take on too much house. But sometimes, it's hard to know exactly what you're getting into until you actually move into a home and find out what it costs to maintain it.

You might, for example, buy a home that works for you financially based on your mortgage payments and property taxes. But if the home is larger and costs way more than anticipated to heat, cool, and maintain, then you could end up in a tough financial situation.

If you've concluded that you bought too large a home and are struggling to afford it, you may be eager to sell it and downsize. But because of where mortgage rates are sitting today, that may not save you as much money as expected. It may not even save you any money at all. So a better bet may be to rent out part of your home rather than unload it.

A smaller mortgage at a higher interest rate may not save you much

A few years ago, had you been in a similar situation, selling a larger home and replacing it with a smaller one probably would have made more financial sense. Mortgage lenders were offering much lower interest rates on home loans than they are today. But because mortgages have gotten expensive to sign, the savings you reap by downsizing may be minimal today, or even nonexistent.

Let's say you're sitting on a 30-year, $300,000 mortgage at 3%. That has you paying $1,265 a month in principal and interest.

Downsizing your home and buying a new one might allow for a $200,000 mortgage instead. But if you're forced to sign a new 30-year loan at 7%, which is roughly the average rate today, you'll be looking at $1,330 a month in principal and interest. In other words, you won't actually be saving money at all.

Renting part of your home may be a better bet

Because mortgage rates are so high right now, it could pay to look into renting out part of your home and waiting things out if you're having trouble keeping up with your costs. Renting out space within your home has its drawbacks, like having to deal with a tenant and potential issues and noise.

Those issues, however, can be mitigated by doing a thorough screening on any potential tenant that includes not only checking references, but also speaking to previous landlords to verify that they didn't run into any problems. Also, you may find that having a tenant isn't so intrusive if your home has a truly separate space you can rent out, like a finished basement or garage. Plus, you may be able to negotiate certain maintenance items into your tenant's lease. That could spare you the burden and cost of having to do all of the work yourself.

You might assume that selling your home is your best bet if you're struggling to keep up with the costs. But selling may not help your personal finances. Collecting rental income, on the other hand, could make it possible to manage your housing expenses without having to uproot yourself in the process.