Houses are a little like the clothes you buy your kids – they get outgrown. It doesn’t happen quite as frequently as your child needs new shoes, but at some point, the house you bought pre-family won’t fit anymore, and you may start entertaining thoughts of moving up.
It’s easy to imagine that if you have three kids and a dog and live in a two-bedroom house with no backyard that it’s time to buy a bigger house. As much as this appears to be true, however, there is more to moving up than merely needing to. Let’s take a look at some questions you should answer before taking the plunge into a bigger house.
Can You Afford a Larger Home?
While bigger doesn’t always equal better, when it comes to houses, it generally equals “more expensive.” A more expensive home, however, shouldn’t frighten you off the quest for more space.
If you have equity in your current home, you can use it for a large down payment on the new home, bringing your mortgage payments to a more manageable level. If you lack equity, on the other hand, it’s time to crunch the numbers to see if you can afford a larger house payment, plus all the other costs associated with living larger.
Some of the expenses you should consider include:
- Higher utility bills – It costs more to heat and cool a larger home.
- Higher maintenance costs – Larger homes cost more to maintain, both inside and outside.
- Property taxes – Depending on where you move and the home’s assessed value, you may be paying more in taxes.
- Homeowner insurance – A more expensive home will cost more to insure.
Make a household budget of every penny that comes in and how it’s spent. You may find places in the budget you can cut that will help you afford another house.
How is Your Credit?
If you’ve been living in your home for a while, you may not have paid close attention to your credit score. Lenders have tightened their standards, so getting a mortgage is a bit more challenging today than in the past.
If your credit score is less than 700, it’s a good idea to take some time to clean up any dings on your reports. With a score of 700 or more, you’ll get the best rates and thus have lower house payments.
Take a look at your debt-to-income (DTI) ratio as well. Lenders use this calculation to determine how much you can afford to borrow. Determine your ratio by adding up all of your monthly debt payments. These include:
- Auto loan.
- Credit card.
- Current mortgage or rent.
- All other recurring debt payments.
Divide the sum of these payments by your monthly gross (before tax) income and then multiply that result by 100. This is your DTI, expressed as a percent. If the result is more than 36 percent, pay off some bills and bring down high balances before applying for a mortgage.
What About Selling Your Current Home?
In a perfect world, you own your home outright so that the proceeds from its sale are all yours. The world, however, is far from perfect and, according to the Los Angeles Times, two-thirds of homeowners in the United States hold mortgages.
Although many of them have recouped much of the equity lost during the economic downturn, 19.4 percent of American homeowners are still underwater on their mortgages. If you are one of them, you’ll need to deal with short selling your home before entertaining the thought of buying another. Then, you’ll need to move quickly before the ding to your credit rating occurs.
Mortgage or not, if you need to sell your present home to purchase a larger one, you’ll also need to consider the type of market currently underway. A buyer’s market makes it a lot tougher to get top dollar for the home, and it may take longer to sell than it would in a seller’s market.
Moving up is like any other type of move: It can be stressful. Take it a step at a time – ensuring you can afford the move and finding the right house in the right neighborhood – and moving up may just be one of the best things you’ve done for your family.