Moving to a Smaller Home Might Not Save You Money

Unemployment is up, and economists are worried that our economy is headed for -- or, perhaps already in -- a recession. Many Americans are looking for ways to tighten their belts. One way to do that is to unload the big homes they bought during the housing bubble.

Should you consider downsizing? The answer depends upon a number of factors. The benefits of trading down to a smaller house don't always outweigh the costs. In this first part of a two-part series, we look at all the costs. Part two will consider the potential savings, and explain how to crunch your own numbers to see if a move makes sense.

The Costs of Trading Down

Here are some of the costs you can expect to pay upfront when you trade down to a smaller house:

Brokers' fees on your old house: You'll typically pay real estate brokers 6% of your original home's selling price. Given the real estate slump, some brokers may be willing to take smaller commissions to stay in business.

Closing costs on your new house: These costs include a title search, title insurance and an appraisal fee as well as other administrative fees. The total can amount to 2% to 4% of the purchase price. Your lender is obligated to provide you with a good-faith estimate of closing costs.

Moving costs: Moving the contents of a 4,000-square-foot house will cost thousands of dollars -- even more if you are crossing state lines. Consider passing along some items to children or charities before you move to cut down on costs. If the stuff won't all fit in your smaller house, why pay to move it?

Capital gains on the sale of your home: Thanks to the Taxpayer Relief Act of 1997, homeowners can sell a primary residence and pocket up to $250,000 in capital gains ($500,000 if married and filing jointly) without owing the IRS anything. But if your profit is bigger than that, you will have to pay capital gains on the additional amount.

Connection fees: When you move out of your old place, you may have to pay fees to close the accounts for your various utilities -- water, phone, Internet, cable television, power and so on. You will then have to pay new fees to set up utilities at your new home. Both disconnecting and reconnecting can cost $10 to $50 or more per utility, depending on where you live and the utility company you use.

Carrying costs: It took an average of four weeks for a home to sell in 2006, but in today's slumping market it could easily take a lot longer. If you buy your new home before you sell your old one, you could end up paying mortgage costs as well as utilities and maintenance fees on both homes.

The hassle factor: It takes a lot of time and effort to sell your old house, buy a new one and move. Whether you pay others to take care of most of the work or do it all yourself, you will be out money, time or -- most likely -- both.

Psychological costs: Will you be as happy in the new home as you are in your current home?

When you add up all of these potential costs, you may find that trading down isn't the no-brainer that some folks claim. In fact, the right move will depend in part on how those costs compare with potential benefits of making the move.

Up next: The savings, and how to calculate whether trading down is worth the trouble.