Emily proposed the idea recently about what it would look like to downsize our home…and the idea of saving money. The ole “sell the bigger house, buy something smaller, pocket the difference” strategy! It sounds logical until you run the actual numbers.
Then you realize we’re living through one of the strangest housing market environments in modern history. Millions of homeowners are discovering they literally cannot afford to move, even when they want to. Not because houses are expensive. Because cheap debt has become more valuable than square footage.
Here’s the math problem most people haven’t calculated: Your interest rate matters more than your home price when it comes to monthly payments.
Let’s break this down with real numbers:
Scenario A: $600,000 mortgage at 3% interest = $2,530/month (principal + interest)
Scenario B: $400,000 mortgage at 7% interest = $2,661/month (principal + interest)
You just “downsized” by $200,000 and your payment went up $131 per month. Over 30 years, you’ll pay $47,000 more in monthly payments for a house worth $200,000 less. And that’s before we factor in the total interest paid over the life of the loan.
Total interest paid in Scenario A: $310,000
Total interest paid in Scenario B: $558,000
By downsizing, you’d pay an extra $248,000 in interest over the life of the loan. That’s not a financial strategy. That’s a quarter-million-dollar mistake.
This is why the housing market has essentially frozen. It’s not a demand problem or an affordability crisis in the traditional sense. It’s an interest rate trap. People with mortgages locked in at 2.5-4% are sitting on an asset more valuable than their house itself: artificially cheap debt.
The compounding problem: Most people who locked in low rates did so between 2020-2021. Those mortgages are now 3-4 years old. You’ve barely made a dent in the principal. If you sell now, you’re giving up your best financial asset (the low rate) at exactly the moment you’ve built the least equity.
Why this matters beyond housing: This interest rate environment is affecting labor mobility, family decisions, retirement planning, and economic growth. Companies can’t relocate employees. Families can’t move closer to aging parents. People can’t downsize for retirement without taking a massive financial hit.
I’m watching this play out in real time. We’re hiring a CEO for one of our companies and need someone local. Multiple qualified candidates have declined to relocate, with one citing the cost of relocating as one factor. These are executives who could afford the move from a pure cash perspective. But the math still doesn’t work.
If you’re considering a move, here’s the framework for making the decision:
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