Carrie Schwab Pomerantz
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Dear Carrie: Should we now downsize to a smaller house or wait? We have very little equity. My husband will retire in three years and he has lost money in retirement savings. -- A Reader

Dear Reader: The turmoil in the real estate market over the past few years has forced many people to look at what may be their biggest asset -- their home -- in a different light. In many parts of the country, personal real estate has been transformed from an investment back into its primary function: housing. So, I'm glad you asked your question about downsizing. If you're feeling financially constrained -- and given the fact that housing is such a big item in every family's budget -- it makes sense to see if you can reduce your monthly expenses by trading down.

The way to look at this situation is to figure out your real estate options and then crunch the numbers to see what you'll save by selling and buying a smaller place or renting. Here are some things to consider:

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-- What will your current house sell for? You probably have a good sense of this already, since you mention you have little equity, but it makes sense to start by figuring out what you can get for your current house. Be realistic, if not conservative. When you go through this type of analysis, it's almost always a good idea to enlist the help of an experienced local real estate agent. And take a careful look at recent sales of comparable properties.

-- What's the true cost of owning your current home? Your mortgage payment is probably the biggest chunk of your monthly housing costs, but don't forget about the other expenses of home ownership: insurance, property tax, utilities and maintenance. A smaller home could save money on every front, so to make an informed decision, you need to really understand these numbers. As an example, if you're currently spending $3,000 a month on your house, and a smaller house would cut that by $200, it's probably not worth your while, especially given the cost of selling and moving (see next bullet). But if you could lower your housing expense by $1,000 a month, that's a lot of money you could start putting in the bank.

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Carrie Schwab Pomerantz

Carrie Schwab Pomerantz is a Motley Fool contributor.

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