Bigger isn’t always better. Larger homes may seem glamorous, but they’re also more expensive to purchase and maintain. Whether you’re a first-time homebuyer or an empty nester looking to downsize, buying a smaller home can come with financial perks.

How small is a small home? For context, the median size of a home built in 2020 was 2,261 square feet.Tiny homes, which are being considered by an increasing number of homeowners, are typically 400 square feet or less. Somewhere in the middle is a small home, which could be right for you if a tiny home isn’t enough space and a median-sized home is too big or too expensive.

Here are the top money-related reasons to consider purchasing a smaller home.

1. Smaller Homes Cost Less To Buy

Looking for homes with less square footage can have a big impact on your homebuying costs. Of course, there are other factors that determine a home’s price, including age, features, and location. But in general, homes with greater square footage cost more than smaller homes in the same area, so you can set your homebuying budget lower if you shop around for fewer bedrooms.

Since square footage is a common way to break down the cost of a home, it’s useful to know the median price per square foot in the area where you want to live. As of March 2022, the median listing price per square foot for homes in the U.S. is $214.

With a lower home price, your down payment will go further. You’ll start with more equity, which is the difference between what your home is worth and the amount you owe on your mortgage. Making a 20% down payment will also allow you to avoid additional costs for private mortgage insurance on a conventional loan.

Plus, a lower home price and bigger down payment can help you save money in other ways, such as reduced closing costs and a better mortgage rate.

2. Lower Mortgage Payments and Better Cash Flow

A smaller mortgage typically means a lower monthly payment. Compared with paying a more expensive mortgage, buying a small house could help you reap the benefits of homeownership while comfortably affording your monthly payments.

Housing programs have historically considered homebuying to be affordable when the associated costs account for 30% or less of a household’s income. If buying a bigger home means exceeding that threshold for your mortgage, utilities, and other housing expenses, then you run the risk of becoming “house poor” — which is when those costs eat up too much of your budget and leave little money for much else.

If you buy a small house with lower mortgage payments, then you’ll be left with more room in your budget. For example, if you put 20% down on a 750-foot bungalow for $240,000, the monthly payment would be $862 before taxes and insurance, assuming an interest rate of 3.5% on a 30-year fixed-rate mortgage. Putting 20% down on a 2,500-foot house for $600,000 would result in a monthly payment of $2,155 before taxes and insurance, assuming the same loan terms. The monthly payment for the bungalow is less than half the monthly payment for the larger house — a savings of $1,293 per month.

3. Other Escrow Costs Are Cheaper

A downsized home can cut more than just the cost of your mortgage.

Monthly payments to your lender typically include fees for property taxes, homeowners insurance, and mortgage insurance, if applicable. In many cases, payments for taxes and insurance are pulled from an escrow account. Since these costs often depend on the square footage or price of the property, having a smaller home can significantly affect your bills for taxes and insurance.

A standard homeowners insurance policy, for example, should provide enough coverage to rebuild the home. But the higher that estimated cost, the more you’ll pay in insurance premiums. Rebuilding costs can be estimated by multiplying local per-square-foot building costs by the total square footage of the home. Thus, a smaller home likely requires less coverage, allowing you to buy a cheaper homeowners insurance policy.

The way property tax is calculated depends on where you live. But the method that your local government uses to assess your home’s value — and tax you on it — can take the home’s square footage into consideration. Check your local property tax codes to see how a home’s size can affect property taxes.

4. Smaller Homes Are More Energy-Efficient

Another benefit of small house living is that energy bills are cheaper. It requires less energy to keep a smaller space temperature-controlled and comfortable. Smaller homes also tend to have fewer lights and household appliances.

A home under 1,500 square feet saves $287 to $730 per year compared with the average home’s energy costs, according to 2018 data from the U.S. Energy Information Administration. Here are average annual energy expenditures by square footage:

Average Annual Energy Expenditures by Square Footage

Square FootageAverage Annual Energy Expenditures
Average of all homes$1,856
Less than 1,000$1,126
1,000 to 1,499$1,569
1,500 to 1,999$1,919
2,000 to 2,499$2,088
2,500 to 2,999$2,282
3,000 or more$2,631
Source: U.S. Energy Information Administration

Generating energy also produces an enormous amount of carbon dioxide emissions. When a home is more energy-efficient, it reduces its emissions and has less of an environmental impact.

5. Lower Maintenance and Upkeep Costs

Whether you’re maintaining your home or simply cleaning it, having a small home helps you save money.

Having less space can make maintenance and upkeep easier and less time-consuming. It could be the difference between handling a weekly cleaning yourself or needing to pay for a cleaning service. A smaller property also means less time and money spent on lawn care and landscaping. Even if you can handle those things on your own, a larger space still means paying for more supplies and covering higher maintenance costs.

Consider the opportunity cost as well. With a larger home, you may end up spending the day on home maintenance and upkeep when you could otherwise be working or enjoying your life.

6. Cheaper To Furnish

Another one of the benefits of having a small house is that it’s less expensive to furnish. With no space to put a second or even third TV and no spare room to house a guest bed, you can skip those expenses altogether.

Smaller spaces can also limit the temptation to keep buying things, since you only have so much storage space. This could help you make mindful and intentional choices about what you want to bring into your home, and mean less money wasted on stuff you don’t really want or need.

Having fewer things doesn’t need to be a sacrifice. You may find that smaller homes feel cozier than drafty, sprawling houses.

7. You Can Indulge In Nicer Things for Your Home

If your budget is tight, then you might not be able to purchase high-quality furniture or other home essentials that you truly love. Having a smaller space can help create more room in your housing budget and allow you to dig deeper into your wallet to buy top-notch or unique items. As a bonus, these quality pieces may last longer than cheaper counterparts.

Spending less on housing expenses could also mean you’ll be able to afford home improvements that increase your property’s value.

8. You Might Be Able To Buy in a More Desirable Location

One of the starkest examples of trading square footage for location can be found in New York City, where renters and buyers often opt for smaller homes to be in the center of the action. Wherever you hope to live, you’ll have a better chance of affording a home in a central area if you’re willing to live in a smaller space.

It comes down to how you prioritize the amount of space you have versus the location. If you’re looking to live in a more in-demand neighborhood, then choosing a smaller home could be a way to make that happen within your means.

9. Living Simply Could Mean Less Debt and Risk

Instead of buying the biggest house you can afford, let’s say you go with a smaller home that costs much less than the maximum loan you were approved for. You’ll be more likely to make your mortgage payment and manage your other monthly expenses with ease, and cover unexpected bills without accumulating debt.

Having too much debt is risky. If you’re struggling to pay your mortgage, you could start missing monthly payments and fall into foreclosure.

10. You Can Spend More On Other Areas of Your Life

A more flexible budget from small house living can open up your options. You can save money to put toward a new car, vacation, or passion project instead of spending it on housing expenses. If you have dependents, it’ll be easier to support them. You could build your emergency savings and create a financial cushion for a rainy day, or even invest the money you would otherwise be using to pay off a bigger mortgage.

11. Downsizing Is an Opportunity To Get Rid Of Junk

A smaller home can only hold so many things, so downsizing gives you the chance to get rid of unnecessary items that you’ve been hanging on to. The longer you’ve lived in your current residence, the more likely you’ve accumulated stuff that you don’t use or need. Moving to a smaller home requires you to take inventory and focus on what you truly want to keep versus what you can let go of.

Decluttering can help you earn money, too. Consider selling your unwanted items on platforms like Mercari or OfferUp to make extra cash.

12. You Can Become a Homeowner Sooner

Choosing a more affordable property means you won’t have to spend as much time saving for a down payment, and your dream of homeownership will be within reach sooner.

Emily Guy Birken, co-author of “Stacked: Your Super-Serious Guide to Modern Money Management,” opted for a 1,800-square-foot cottage for her four-person household, which includes a cat and an 80-pound greyhound.

“If we had been set on a 3,000-square-foot home in the same area, we would have had to rent for several years while saving up the down payment,” says Guy Birken, who is based in Milwaukee. “Because we chose a smaller home, we were able to buy when we moved to Milwaukee, rather than waiting.”

The Bottom Line on Buying a Small Home

Choosing a smaller, more affordable home could help you become a homeowner sooner and spend less on the upfront costs of getting a mortgage. It’s also easier on your wallet once you own your home, as you’ll likely have a lower monthly payment and cheaper utility costs. Along with paying less, you can enjoy other perks, such as greater flexibility to invest in other areas of your life. All these benefits of buying a small house could make it worth considering whether downsizing is a better match for your budget and your life.

Elyssa Kirkham contributed to the reporting of this article.