Should You Downsize Your Home in 2024?

Although many buyers are struggling to afford homes, a fair number of existing homeowners are in the same boat -- they're having a hard time keeping up with their housing costs. Soaring home values over the past few years have driven up a lot of people's property taxes. And so if you're having a hard time keeping up with the expense of homeownership, you may be thinking of downsizing in 2024.

Shrinking your square footage and buying a smaller, less expensive home might provide the financial relief you're looking for. But because of the way mortgage rates are trending today, you'll need to be very careful about downsizing your home in the new year.

Will you come out ahead financially?

Let's say you own a home worth $500,000. Downsizing to a $350,000 home might seem like it will lower your costs. But that logic may not hold if you need to sign a mortgage to downsize.

Although mortgage lenders recently lowered their rates, borrowing for a home is still expensive. As of this writing, the average 30-year mortgage rate is 7.44%, according to Freddie Mac.

Meanwhile, you might have a pretty low mortgage rate on your current home -- either because you locked in a low rate to begin with or because you refinanced your mortgage a few years ago when rates fell to competitive levels. So you'll need to do the math to make sure downsizing will really result in decent savings for you.

Do the numbers work out?

There's a good chance that mortgage rates will drop a bit in 2024. But it's hard to predict to what extent.

But let's be optimistic and say that rates fall to 7%. If you currently have a 3% mortgage, you're still looking at more than doubling your rate.

Meanwhile, let's say you currently own a $500,000 home and owe $400,000 on it at 3%. That leaves you with a monthly payment of $1,686 for principal and interest on your loan. If you can sell your home yourself without the help of an agent and get your seller to cover any applicable real estate transfer taxes, you can potentially walk away with a $100,000 profit to put down on your next (smaller) home.

So let's say you find a $350,000 home and take out a $250,000 mortgage to finance it at 7%. At that point, you're looking at a monthly mortgage payment of $1,663. So all told, you're really not saving a notable amount of money -- you're shaving just $23 a month off of your monthly mortgage payments, and that assumes you took your full $100,000 profit from your home sale and didn't need to use an agent and pay a fee.

Of course, downsizing could mean saving money on property taxes and maintenance, so that's where you might enjoy some savings. The point, however, is that unless you're able to buy a smaller home in cash, downsizing may not make sense in 2024 if mortgage rates remain so elevated.

In this example, let's say you're saving under $300 a year by virtue of smaller mortgage payments but are also saving another $6,000 a year via lower property taxes and maintenance costs. That may be worth it.

But if you're only shaving $2,000 a year off of your taxes and maintenance, then going through the hassle of uprooting your family to downsize may not be worth it. You may, at that point, decide you'd rather just take on a second job to help make your current home more affordable.

At some point, mortgage rates are bound to drop more significantly. And downsizing could make sense then. But that may not happen in 2024, so keep that in mind as you work through your options.