No matter how much you love your home, the time may eventually come to take the next step in home ownership: a larger property for you and your family. While purchasing a second property is often easier than buying your first – after all, you’ve been through it once before – there are still plenty of logistics to keep in mind, including securing another mortgage.
For families who feel as though they have outgrown the space they currently have, the urge to buy can be overwhelming. However, there are many points to consider before taking the plunge in the real estate market.
Wanting a larger home and being able to afford a larger home are two different things. If your income hasn’t changed since your first home purchase, you may not be in a position to upgrade in the same metro area.
The rules don’t change with a second home purchase, so keep the 28-50 rule in mind as you continue your quest: your housing costs shouldn’t exceed 28 percent of your gross income, while your debt-to-income ratio shouldn’t surpass 50 percent. While these figures are general recommendations for financial health, many lenders abide by them, too, so know where you stand before you start soliciting quotes. Take recent changes to your income and debt situation into consideration, like raises, bonuses, and additional loans. Lifestyle creep can be a problem, so put pencil to paper and determine how much you can truly afford – not how much you wish you could afford.
It’s easy to dream about a big, beautiful home with state-of-the-art everything and more rooms than you know what to do with, but fantasy and reality have to meet somewhere. For example, if your family isn’t big on cooking, a large kitchen likely isn’t as important, and if you don’t work from home often, a fourth bedroom to use as a home office is probably unnecessary.
As you start to search for your next property, keep your size expectations realistic, particularly if you have a limited budget. While a good mortgage broker can help you save money month to month, you only need so much house, and exceeding your requirements may put you on financial thin ice.
A big backyard is great for kids, but an urban location makes your commute simple. You need an extra bedroom for your growing family, but the large homes in your neighborhood are out of your budget. What do you do?
Weighing the pros and cons is an important part of a home search, particularly as you scale up in size. As homes get more expensive, picking and choosing becomes essential. Instead of finding yourself in a property that isn’t right, think seriously about wants and needs. While a large finished basement may be something you’d like to see, a sufficient number of bedrooms is more important. Find this line and do your best to stick with it. Otherwise, you may find yourself without access to a mortgage that will cover an exhaustive checklist of must-haves.
Saving up for a substantial down payment is a challenge somewhat unique to first-time homebuyers. For subsequent purchases, the money received from the sale of your current home provides most, if not all, of the down payment amount. However, this means that both the value of your current home and the equity held in your current home will play a role in how much you will have available to put down as well as your mortgage eligibility.
While there are lenders who will provide funding with a down payment of less than 20%, this often means added expenses, such as private mortgage insurance (PMI), which can make your monthly payments less affordable. As larger homes tend to be more expensive, a 20% down payment will be a larger requirement than it was the first time around, so keep in mind the going rates in your neighborhood before hitting the open houses.
Buying a home isn’t a short-term impulsive decision. Your purchase will have long-lasting implications on your finances. As such, you need to consider more than just your immediate wants as you plan to size up.
Say, for example, you’re planning to go back to school in several years or move back to your hometown to be closer to family. If these kinds of relocation plans are on the horizon, buying now may not be the right choice.
Most lenders and real estate agents recommend the five-year rule: plan on staying in any home for at least five years to maximize gains and reduce the risk of losing money. In most cases, if you can’t bank on 60 months at minimum, the costs associated with closing and homeownership may exceed the equity you’ll gain in those first few years.
All mortgage lenders are not equal, and all lenders have different things to offer, from variable interest rates to differing underwriting processes. As with your first home loan, it’s important to find a lender that is a good fit for you – not a lender more concerned with their own bottom line.
Choosing the right home is never easy, but the wrong mortgage lender makes it harder. A good lender will be straightforward with you, offering transparent information about fees, preapproval terms, and lending limits, keeping you informed every step of the way. Your lender can help you determine how much you should spend, the kinds of terms and interest rates you can expect and the pros and cons of your individual situation.
If you’re considering making the leap to a larger home, there’s a lot of information to keep in mind. With the right agent – and the right mortgage lender – by your side, however, you can be sure you’re as prepared as possible.