Getting Financially Organized
Trading Up, Downsizing, Downsizing versus Renting

Trading Up
Before you set out to trade in your current house for a "better" one, you need to take a good look at your overall budget and determine how much more, if any, of your monthly spending can go toward increased housing costs.

How do you figure out where all your money goes each month? Get out your checkbook register, credit card statements, paycheck stub, most recent year's tax return, and anything else that documents where you've been spending your money over the past six to twelve months. You may also need to do some tracking or estimating of cash purchases that don't leave a paper trail. Estimating your housing budget.

Figuring your expected expenses after trading up
Knowing how you spend your money now on housing and other items is only half the picture. You also need to know how much you will spend after buying your next home. The following expenses are probably going to change the most if you sell your current house and buy a new home:

• Mortgage payment: Unless you've been squirreling away extra savings while living in your current house, the total amount you're borrowing through your mortgage (and, therefore, your monthly mortgage payment) will probably increase if you trade up.

• Property taxes: In most communities, the annual property taxes you pay on your next home purchase are initially set at a percentage of the property value. To find out the property tax rate in the area where you plan to purchase your new home, simply call the local tax collector, assessor, or other taxing authority. Don't base your property tax estimate on the amount that the seller of the home you're interested in buying is currently paying or on the amount you're paying on your present house. When you trade up, the taxes on the home you buy are usually reassessed upwards.

• Utilities: If you're trading up, some of your utility bills may stay the same, whereas others will change. Until you have a specific home in mind to buy, you can't request hard numbers on utility usage. In the interim, make some educated estimates. For example, if you're planning on moving into a larger home in your area with, say, 30 percent more square footage, you can estimate that your heating and electric bills will increase by about 30 percent. However, if you're moving from an old, energy-inefficient home into a newer and more efficient one, the new home may not cost you more in utilities even if it's a bit larger.

• Furniture: If you buy a larger home, you'll have more space to fill, so you're probably going to spend more money on furnishings. Make a reasonable estimate of how much you expect to spend on new furnishings.

• Maintenance: If you're buying a more expensive home, you're probably also going to spend more on maintenance, even if the home isn't a fixer-upper. A good way to estimate your annual maintenance costs is to multiply the purchase price of the home by 1 percent (use 1.25 percent of the purchase price for older and more run-down properties).

• Federal and state income taxes: If you buy a more expensive home and have larger mortgage payments and property taxes, your income tax bill will probably go down. Mortgage interest and property taxes are deductible expenses on Schedule A of your federal income tax Form 1040 and on most state returns.

• Homeowners insurance: If you buy a more expensive home, your homeowners insurance premiums will probably increase. In the absence of a specific quote for a property you're interested in buying, you can estimate that your homeowners insurance costs will increase in proportion to the increased size (square footage) of your home. Because land isn't insured, ignore the extra land that may come with your next home.

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Downsizing
One day you suddenly come to the realization that you've got more space than you really need. Now may be the time for you to trade down.

Tax benefits for house sellers
Thanks to the Taxpayer Relief Act of 1997, house sellers can more easily shield from tax a big portion of their house sales profits. Single taxpayers can avoid capital gains taxation on up to $250,000 and couples filing jointly up to $500,000 of profit. As long as you lived in the house as your primary residence for at least two of the previous five years, this tax exclusion is available to you.

Presuming you're willing to sell your primary residence, the new house sales tax law makes it easier to convert your home equity directly into liquid investments you can live off during retirement. Of course, such a strategy requires you to either trade down or become a renter; trading to an equal cost or more expensive home won't free up more of your money.

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Downsizing versus Renting
In most cases, downsizing is a wiser financial decision than becoming a renter. If you're able to pay for your new home in cash, your housing costs during retirement will be minimal. The price range you should consider depends on a couple of factors:

• How much other money do you have for retirement? You may be willing to buy a considerably less expensive home to free up more money. However, until you run some retirement projections to see where you stand, you won't know how much or little you need to withdraw from your home's equity.

• What do you want to buy? If you want to scale down and move into less expensive housing market, you can probably count on spending much less on your next home.

Downsizing to renting
Some people sell their houses and simply rent in retirement. By selling, you free up all the money invested in your house and make it available for you to live on or do with as you desire. And, when you rent, you have more flexibility to move in the future. If you are considering selling your house and renting in retirement, you should consider exposure to rental inflation. As a renter, unless you live in a unit protected by local rental control ordinances, your monthly rental payment is exposed to inflation. $1,000 per month in rent today may not sound much, but consider that, with just 4 percent annual increases, in 20 years, your rent move to nearly $2,200 per month.