While many people in urban and metropolitan areas often live in the same multigenerational homes they grew up in, in suburban areas, parents who purchased larger family homes and whose children have 'flown the coop' are finding themselves struggling to deal with the related costs and upkeep of their home. This happens in cases where the kids move away for job opportunities, for school, or to start a family elsewhere.
Helping elderly parents downsize can be a daunting task, especially if they have lived in the same home for many years. For some, it's an exciting prospect to de-clutter, but for many, it can be emotionally fraught and practically challenging.
So how can dutiful children support their parents in making this big decision?
It may take having an open conversation about the benefits of downsizing which include financial freedom, less upkeep, and more time for them to do the things they love.
The Benefits of Downsizing
Over the years, the family home is likely to have increased in value, and your parents may be close to paying off the mortgage, if not having paid it off completely.
Moving to a smaller home can be a real opportunity for empty nesters to save money and enjoy the equity freed up from their home sale. It also means they can buy their new home as a cash buyer, giving them the opportunity to live mortgage free.
Example: Home is worth $800,000 and they have $300,000 remaining on the mortgage. Selling costs is 6%. Their net proceeds will be $452,000. They can use 25% for a down payment on a condo in an area they want to be in. The remaining funds will be used to pay the payments and for them to use as disposable income in retirement.
While it may initially seem like a lot of work, downsizing to a smaller home is a long-term investment that will mean less upkeep, lower bills, and more time to relax in retirement.
Once your parents start thinking about downsizing, here are tips and considerations -
Practical Tips for Helping Your Parents Downsize
- Create a pro/con list with your parents. Consider tangible reasons for downsizing: is it necessary? Will the long-term benefits outweigh the challenges?
- If they're excited about the change, consider location and property tax. In certain counties, your parents can transfer the tax base of their primary residence to a new home. Let's say the new home costs two million dollars. If your parents choose to downsize, the tax will be based on $500,000, the assessed value of the family home. It's cost prohibitive because of a tax loophole. Additionally, Prop 19 makes it easier for anyone over 55 years of age, disabled, or victims of a wildfire or natural disaster to transfer the assessed value of their California primary residence to a new home anywhere in California. They can do this three times in their lifetime, and they have two years to transfer their low property tax.
- Look at the type of available properties that would work for your parents, and whether they can afford them. Will they have to make a compromise or is there a lot for them to choose from?
- Start letting things go - donate, give items to family members and separate out the items that you really love and feel strongly about from those you don't really need. It's an opportunity to clear everything and save yourself money when you pay for removals.
- See if your parents qualify for a reverse mortgage or forward mortgage loan. Your parents may not even need employment to qualify.
- A reverse mortgage loan, is usually secured by a residential property, that enables the borrower to access the value of the property. The loans are typically promoted to older homeowners and typically do not require monthly mortgage payments or a lump sum payment will be paid out to the borrower. Upon the death of the borrower, the balance becomes due. The family can decide whether they want to pay off that balance or sell the home.
- A forward loan is when you qualify based on income. Once qualified, you'll pay it off for 10-30 years and that home will be yours free and clear.
Downsizing can be frustrating for those resistant to change or who have become accustomed to their home, but there are so many advantages and opportunities. From the chance to save on bills to making household tasks more manageable, downsizing can be incredibly exciting. And if you buy a cheaper property than the one you sold, that extra money can go a long way to helping you enjoy life in your new home!
To do a cost/benefit calculation or review your parents' overall financial situation, e-mail us at Scott@mademortgage.com to schedule a free 25 minute consultation. Bookings will be subject to availability and clients will have the opportunity to book subsequent appointments at the hourly rate $150.