Upgrading Costs More than You Think
What if I told you that selling your house and buying a new house at the exact same price would cost you more. Why would that be? Well, this can happen for three reasons:
1. Property Tax Reassessment
Chances are, your “assessed value” is actually lower than the fair market value of your house. When you buy a new house, that new property’s tax basis is reset to the purchase price, which means your carrying cost will likely go up.
2. Transaction Costs
As the seller, it’s typical for you to cover the selling costs for both the buyer and seller’s real estate agents, which means you typically lose around 6% of your sales price. There are also one-time costs like escrow fees, appraisals, and inspections that you don’t get back. This means you have less money to put towards your new house. You would need to supplement that with a bigger mortgage (higher monthly cost) and/or additional cash (which is money that could have been invested elsewhere).
3. Mortgage Re-Amortization
I may or may not have just invented that phrase – now let’s see if I can define it. The longer you have a mortgage, the more of your payment goes to principal over interest (most mortgage providers have cool calculators that show this effect over time). Buying a new house for many people means getting a new mortgage, which means your new mortgage payments will go more towards interest than before. Over time, that means you are paying more in total interest costs.
Don’t Let Your Stuff Control You
I hear people say all the time, “But I have too much stuff!” Hey, I get it. I have three kids under seven, and kids come with a lot of stuff. But you are also capable of hopping off the consumption hamster wheel and opting out any time you’d like.
How would your life be if you had half as much stuff? If you took all the items that you haven’t used in a year and just got rid of it? Would you be less happy?
I’m going to say this in the most loving way possible: spending more money to store more unnecessary stuff is bonkers. The better thing to do – for our wallets, for the environment, for our sense of fulfillment and peace of mind – is to cut down on how much stuff we have and choose to consume. Purge your storage, stop buying so many things that need to be stored, and voila! You no longer need a bigger house.
Smaller House, Bigger Picture
Your lattes are not the problem in your financial plan. It’s generally the biggest ticket items such as housing and transportation where you can move the needle most in saving money.
And money often means time. If you didn’t have to work harder to earn more money to afford a bigger house, what could you enjoy instead? Would you have more time with your family? More time and money to travel, volunteer, or garden?
Our economy thrives when we have that unquenchable need for more and better, and yet our personal sense of wellbeing can suffer from that unquenchable need. It can be a brave (and extremely rewarding) investment in yourself to finally get off that consumption treadmill.
If you would like to evaluate how you’re living and to make a better, more secure investment in yourself, reach out to an Abacus advisor today for a free consultation.
