Help me calculate savings via smaller mortgage.

I'm probably overthinking this.  Very long story short, my wife and I are considering downsizing our house with the long term goal of me retiring.  Our current home is bigger than we need, as my kids don't stay with me much.  I know there are a ton of variables, but I'm trying to wrap my arms around how much we'd save over the next 5 years if we downsized.  Here are some basic round numbers...they aren't exactly our situation as I don't want to open our books to the world, but it'll give me a very good idea of what we'd save.

Current home - Bought 2 years ago at $350k, put 20% down.  3% interest on 30 year loan.  Current value approx $425k  Current loan balance approx $270k.  Projected value in 5 years if we were to stay here approx $450k

Downsize home - Buy at $200k.  Put $100k down (from sale of current home).  Put $20k in refurb.  Sell in 5 years for $260k (being conservative, would hope for more).  15 year loan

Math is hard....

IMO You would not save money. 6-8% of the sale would go to the realtor for selling. Then moving cost. New costs of taxes on new home. Transportation of driving could go up (groceries, place of employment  etc).  Pay down your mortgage, home values go up faster than a savings account.  Rent out a room to college kid that needs a place. Are you happy with the memories of your current home?

The difference between the two loans at 3 for 275000 vs 6 percent for $100,00 is $200 a month  for the lower  amount loan . So you would save $2400 yr x 5 years so a gain of $12,000 but as mymiatas pointed out you are selling one extra house , realtor, title insurance doc stamps etc I costs I generally estimate 10/ percent of a $425000 house equals 40,ooo. My guess is that it costs you money.

This is where I'm trying to put all the numbers down on paper and make sense of it.  We know our realtor, so costs would be less than normal.  Moving would be very cheap as well, we spent well under $1k to move into this house.  The concept we're going for is downsizing and doing a light flip.  Buying something in need of cosmetics (yes, put a lot extra in the budget) and then either selling it in 5 years or keeping it and renting it.  I have no problem staying in this house if that's what works out best financially...it's just more than we need.  

In reply to SKJSS (formerly Klayfish) :

Without doing any math, what kills you here is the new interest rate. By going for a 15 year mortgage on the new house you are offsetting some of that and if you add some extra cash every month you would also lower the rate ... here is where the math with clear numbers could tell you if you would end up ahead of not. 

Google "Karl's mortgage calculator". I think it will help you have a clearer picture. 

Taxes on new home would be lower based on the buy price you mentioned. 

Here, I prefer the "old" Karl's calculator:

Karl’s old calc

There is a newer, maybe you like it better. 

Go look at those $200,000 homes - you might not be happy.  

We sold our $179,000 x 1200 sqF house in 1999 and a lot of older people weren't happy looking at it thinking they can sell their $350,000 3,000 sqF home and downsize to my house.  They always felt it was too small.  

A 65 year old guy at work downsized and sold his $410,000 house and ended up buying a $415,000 house - basically he just traded to get rid of a lot of stairs.  

We always account for about 10% to sell, your may be lower if your realtor drops their fee, but even if they do it for free they can only drop 3%.

One thing to find out, is if your loan is assumable. I think most VA or FHA loans are. If you can market it with that 3% rate for qualified buyers you can get a premium. Its not very common, but it is becoming more common now because of the rate movement.

I also wouldnt count on houses appreciating in the short term, with whats going on. Not saying they wont, and obviously eventually they will, but in the short term, I wouldnt bet on it or make major decisions based on it.

There are too many variables that could go either way.

Things to consider

Utilities and who supplies them. Smaller house may be more (less efficient) or less (smaller) to heat and cool. Area may dictate who supplies it which could have a massive effects on costs. (a friend live a couple miles from me. I have a bigger 140 yr old house he has smaller brand new energy efficient house, and he pays more than double for all of his utilities because he has a different supplier.

Taxes - expectation is a less valuable house will cost less in taxes, but it depends on what tax districts it falls in

maintenance - could go either way

reno - it always costs more than you plan, even if you do it all yourself. Tell yourself 20K and budget for 40K

How hot the area is  - hard to predict but either neighborhood could stagnate or skyrocket in popularity

Fuel - how far are you going to be driving to the places you go like work and the grocery store

Insurance - an older home can greatly increase the cost of insurance, or a cheaper house could be cheaper to insure.

SKJSS (formerly Klayfish) said:

This is where I'm trying to put all the numbers down on paper and make sense of it.  We know our realtor, so costs would be less than normal.  Moving would be very cheap as well, we spent well under $1k to move into this house.  The concept we're going for is downsizing and doing a light flip.  Buying something in need of cosmetics (yes, put a lot extra in the budget) and then either selling it in 5 years or keeping it and renting it.  I have no problem staying in this house if that's what works out best financially...it's just more than we need.  

Just a general observation.  If you want to do it, then do it.  Above sounds a little like you are trying to justify and talk yourself into it (moving for example - with gas and general labor shortage, will it really be as cheap as last move?).  I haven't run the numbers but I am reminded of the addage of a project takes twice as long as costs twice as much as other wise ones have brought up commission, doc stamps, moving costs, etc.

Are you looking to have better cash flow or more net worth at the end of a period?

I am starting to be of the opinion that if you. Am keep your head above water the most expensive house you can have will yield the most net worth X years from now. 
The main reason for this is things appreciate. The higher the starting value the higher the appreciation amount will be. Not gonna do the math but I'm sure you get the idea. 

In reply to NY Nick :

Its not uncommon for different cost segments in the housing market to appreciate at different rates. Prior to all this housing craziness my rental house had more than doubled in value in less than a couple years. Even during all the craziness of the last few years, the much more expensive house we live didnt quite appreciate that much, in raw numbers or as a percentage.

That being said I still agree with you, mainly because paying a mortgage and getting equity, is the closest thing most Americans get to actually saving and investing money.

Alternate solution if the current lot will allow it....

Build a 3-car garage or carport with a nice apartment above. Rent the $400k house for 2x mortgage. Live above the garage. When you get tired of that, move on and rent both. Or sell. 
 

example: this airbnb in Chattanooga TN that I rented a couple years ago. 
 

In reply to Opti :

Completely agree with all that. I was just trying to simplify my answer. The question is somewhat generic too so I thought it would be directionally accurate. 

Am I following/understanding you, that you're considering downsizing for 5-years, and then doing something else?  
 

Skipping the math, is it emotionally worthwhile to you to change houses for 5-years?  
 

Playing with that, would with going straight to the end game, either now or in 5-years, be a more satisfying choice?

If we moved, it would be local...10-15 miles at the most.  We're in the outer suburbs of Atlanta, real estate is still (relatively) cheap.  Real estate is all about location, location, location as they say.  We have looked at houses in the $200-$250k range and they're not as bad as you'd think.  Some of them are in areas where there are a lot of new $500k houses going up, so that could play a role.  Problem is it's all speculation, relying on experts for an "educated guess".

We're in no hurry and if we wind up staying, all is fine.  It's a lovely house.  New construction (will be 2 years in June...which is when we won't have capital gains tax), high end finishes, etc...  When we bought it, we expected my kids would stay with us much more.  They usually stay with their mother (who lives 15 minutes away) and come over for dinner, etc...  It's just much more than we need.  We're just trying to determine if the equity we have in it is better placed elsewhere.  I'm not necessarily pro-moving or anti-moving...I'm pro-financial gain.  

I pulled up an amortization table this morning.  From just the mortgage and equity perspective, it appears we'd come out ahead with downsizing, but I want to make sure my math is right.  Of course, it also doesn't factor in closing costs.  There is also the possibility of keeping the downsized house and renting it out in 5 years (we plan to leave Atlanta then).  We already have an investment property, not sure I want two...

I'm not an emotional type person with houses and neither is my wife.  For us, it's about the long term goal...in 5-ish years we will leave Atlanta and be snow birds.

It's all about location, but people I've chatted with in my greater area simply can't find anything to trade down to. They don't seem to be building smaller houses, and if they are, the costs are so high you end up paying as much for a lot less.

The comment by Datsun310guy "A 65 year old guy at work downsized and sold his $410,000 house and ended up buying a $415,000 house - basically he just traded to get rid of a lot of stairs." seems to be a very common situation here (Colorado Front Range).

And if you go further out from Atlanta, you'll probably have to deal with the factors other people have mentioned, like more time, distance, hassle, and cost to go anywhere.

Here's wishing you success, whatever you decide!

Current loan: 30 year, $350k - 20% down @ 3% interest should be around $1180/mo before taxes and insurance.

Future loan: 15 year, $200k - 50% down @ 6.5% interest would be $870/mo before taxes and insurance.

So you'd save around $300 per month (assuming taxes and insurance are roughly the same). Multiply that by 60 months for your 5 year timeline, and you get $18000 in savings.

But you're planning on a $20k reno budget for the new place, which puts it $2k in the hole compared to just staying put. And that's before you account for transaction costs, moving, or potential refurb budget changes. You would end up spending more than you would to live in the current place, and gambling on appreciation (which you have no control over, and is highly variable) to make any profit for you. If you get lucky and it appreciates as much as you think to $260k, then you'd make something around $40k true profit (not counting principle paydown) - selling/moving costs.

If that $20k equity from the current house were invested into an index fund rather than spent on a reno, then with average returns (7%) it would be worth $29k after 5 years. If you put the $300/mo mortgage savings into the same investment, it grows to $49,800 combined after 5 years. If you went with a 30 year mortgage instead of a 15, your monthly payment would be $630 before taxes and insurance. That frees up $550/mo that could be invested vs the current mortgage. If that amount is invested each month on top of the original $20k instead of using it for reno, it would be worth $67,700 after 5 years.

So it comes down to whether you feel like you'll be luckier with real estate appreciation over the next 5 years, or the stock market. The stock market has the potential to out earn your house given your numbers, but it would require a 30 year mortgage instead of a 15 to really juice the returns. Stocks are much easier and cheaper to liquidate than real estate too for whatever that's worth to you.

In reply to SKJSS (formerly Klayfish) :

Others have done a good job crunching the specific numbers for you so as a 58 y/o I'll just say that in general you win when you avoid this...

...a bunch of people with their hands out wanting (justifiably) to get paid for whatever service they've provided.

I've bought four homes in my life (the first was an income property and the other three I lived in with two of those being inter-family transactions so no realtors and no public loans were involved).

I've saved a $hit ton of money over the course of my life by minimizing "change"; buy n' hold my friend...don't feed those hands.

Note on 15 year mortgages...

There is currently almost zero difference in the rates for 15 year vs 30 year.  I'm buying a house right now and chose the 30 year.  The rates are very similar, and I can voluntarily overpay the payments to pay it off in 15 years (or less).  That way if times get tough, I am not committed to the larger payments.