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If you spent your teenage years waiting anxiously for one of your siblings to get out of the shower, the idea of selling your spacious, multi-bathroom home and moving into a smaller house or condo may feel like a reversal of fortune.

Yet for many retirees, downsizing makes financial and practical sense. Younger baby boomers — those currently ranging in age from 57 to 66 — made up 17% of recent home buyers, while older boomers — ages 67 to 75 — accounted for 12%, according to a 2022 report from the National Association of Realtors Research Group.

Boomers’ primary reasons for buying a home were to be closer to friends and family, as well as a desire to move into a smaller home, the report said.

A smaller house or condo typically requires less maintenance and may be more accessible than a two-story suburban house. And at a time when homeowners age 62 and older have more than $12 trillion in home equity, downsizing offers a way to free up some of that equity for other purposes, such as shoring up retirement accounts or saving for long-term care.

For retirees Fred and Shelby Bivins, selling their home will enable them to realize their dream of traveling in retirement. The Bivinses have put their 2,050-square-foot Arizona house on the market and relocated to their 1,600-square-foot summer condo in Wisconsin. Eliminating the cost of maintaining their Arizona home will free up funds for overseas trips.

With help from Chris Troseth, a certified financial planner based in Plano, Texas, the Bivinses plan to invest the proceeds from the sale of their home in a low-risk portfolio.

Once they’re done traveling and are ready to settle down, they intend to use that money to buy a smaller home in Arizona.

“Selling their primary home will generate significant funds that can be reinvested to support their lifestyle now and in the future,” Troseth said. “Downsizing for this couple will be a positive on all fronts.”

The effect of mortgage rates

For all of its appeal, downsizing in today’s market is more complicated than it was in the past. With 30-year fixed interest rates on mortgages at 7.5%, many younger homeowners who might otherwise upgrade to a larger home are unwilling to sell, particularly if it means giving up a mortgage with a fixed rate of 3% or less.

More than 80% of consumers surveyed in September by housing finance giant Fannie Mae said they believe this is a bad time to buy a home, citing mortgage rates as the top reason.

As a result, buyers are competing for limited stock of smaller homes, said Hannah Jones, senior economic research analyst for Realtor.com.

Here, though, many retirees have an advantage, Jones said. Rising rates have priced many younger buyers out of the market and made it more difficult for others to obtain a loan.

That’s not an issue for retirees who can use proceeds from the sale of their primary home to make an all-cash offer, which is often more attractive to sellers.

While the U.S. median home price has soared more than 40% since the beginning of the pandemic, prices have risen more slowly in parts of the Northeast and Midwest, Jones said.

“Out of all of the regions, the Midwest tends to be the most affordable,” she said. “You can still find affordable homes in areas that offer a lot of amenities.”

The Mortgage Bankers Association reported in October that mortgage purchase applications slowed to the lowest level since 1995, as the rapid rise in mortgage rates has pushed many potential buyers out of the market.

However, because of tight inventories, there’s still demand for homes of all sizes, Jones said, so if your home is well maintained and move-in ready, you shouldn’t have difficulty selling it.

“The market isn’t as red-hot as it was during the pandemic, but there’s still a lot to be gained by selling now,” she said.

Other costs to factor in

If you live in an area where real estate values have soared, moving to a less expensive part of the country may seem like a logical way to lower your costs in retirement.

But before you move to a lower-cost locale, make sure you take inventory of your short- and long-term expenses, which could be higher than you expect.

Selling your current home, even at a significant profit, means you will incur costs, including those to update, repair and stage it, as well as a real estate agent’s commission (typically 5% to 6% of the sale price).

In addition, costs for your new home will include homeowners insurance, property taxes, state and local taxes, and homeowners association or condo fees.

Nicholas Bunio, a certified financial planner in Berwyn, Pa., said one of his retired clients moved to Florida and purchased a home that was $100,000 less expensive than her home in New Jersey. Florida is also one of nine states without an income tax, which makes it attractive to retirees looking to relocate.

Once Bunio’s client got there, however, she discovered that she needed to spend $50,000 to install hurricane-proof windows.

Worse, the only homeowners insurance she could find was through Citizens Property Insurance, the state-sponsored insurer of last resort, and she’ll pay about $8,000 a year for coverage.

Her property taxes were higher than she expected, too. When it comes to lowering your cost of living after you downsize, “it’s not as simple as buying a cheaper house,” Bunio said.

Don’t forget good healthcare

Before moving across the country, or even across the state, you should also research the availability of medical care.

“Oftentimes, those considerations are secondary to things like proximity to family or leisure activities,” said John McGlothlin, a CFP in Austin, Texas. McGlothlin said one of his clients moved to a less expensive rural area that’s nowhere near a sizable medical facility. Although that’s not a problem now, he said, it could become a problem when they’re older.

If you use original Medicare, you won’t lose coverage if you move to another state. But if you’re enrolled in Medicare Advantage, which is offered by private insurers as an alternative to original Medicare, you may have to switch plans to avoid losing coverage.

To research the availability of doctors, hospitals and nursing homes by Zip code, go to medicare.gov/care-compare.

At a time when many older adults suffer from loneliness and isolation, a sense of community matters, too. Bunio said one of his clients considered moving from Philadelphia to Phoenix after her daughter accepted a job there. The cost of living in Phoenix is lower, but the client changed her mind after visiting her daughter for a few months.

“She has no friends in Phoenix,” he said. “She’s going on 61 and doesn’t want to restart life and make brand-new connections all over again.”

Consider renting for a while

Once you’ve settled on a community, consider renting for a few months to get a feel for the area and a better idea of how much it will cost to live there.

Bunio said some of his clients who are behind on saving for retirement or have high healthcare costs have sold their homes, invested the proceeds and become permanent renters. This strategy frees them from property taxes, homeowners insurance, homeowners association fees and other expenses.

Thanks to the construction of new rental properties in several markets, the rental market has softened in recent months, according to Zumper, an online marketplace for renters and landlords. In 75 of the 100 cities Zumper surveyed, the median rent for a one-bedroom apartment was flat or down from the previous month.

Tap into home equity

Even if you opt to age in place, you can tap your home equity by taking out a home equity line of credit, a home equity loan or a reverse mortgage.

At a time when interest rates on home equity lines of credit and loans average around 9%, a reverse mortgage may be a more appealing option for retirees. With a reverse mortgage, you can convert your home equity into a lump sum, monthly payments or a line of credit. You don’t have to make principal or interest payments on the loan for as long as you remain in the home.

To be eligible for a government-insured home equity conversion mortgage (HECM), you must be at least 62 years old and have at least 50% equity in your home, and the home must be your primary residence.

The maximum payout for which you’ll qualify depends on your age (the older you are, the more you’ll be eligible to borrow), interest rates and the appraised value of your home. In 2024, the maximum you could borrow was $1,149,825.

There’s no restriction on how homeowners must spend funds from a reverse mortgage, so you can use the money for a variety of purposes, including making your home more accessible, generating additional retirement income, or paying for long-term care. You can estimate the value of a reverse mortgage on your home at reversemortgage.org.

Up-front costs for a reverse mortgage are high, including up to $6,000 in fees to the lender, 2% of the mortgage amount for mortgage insurance, and other fees. You can roll these costs into the loan, but that will reduce your proceeds.

For that reason, if you’re considering a move within the next five years, it’s usually not a good idea to take out a reverse mortgage.

Another drawback: When interest rates rise, the amount of money available from a reverse mortgage declines. Unless you need the money now, it may make sense to postpone taking out a reverse mortgage until the Federal Reserve cuts short-term interest rates, which is unlikely to happen until late 2024 (unless the economy falls into recession before that).

Even if interest rates decline, they aren’t expected to return to the rock-bottom levels seen over the past 15 years, according to a forecast by “The Kiplinger Letter.” And with inflation still a concern, big rate cuts such as those seen in response to recessions and financial crises over the past two decades are unlikely.

This article first appeared in Kiplinger’s Personal Finance Magazine. © 2023 The Kiplinger Washington Editors, Inc. Distributed by Tribune Content Agency, LLC.