Upsizing your home is a big decision, and it comes with a lot more complications than just finding the right place. Before you start the house hunting process, make sure a bigger home is really the right fit for you and your family. Here are some factors to consider before you make the move:
Do you really need to upsize your home?
It can be easy to start dreaming of a bigger home simply because you think you should. Maybe you’ve been in a starter home for awhile. Maybe your family has grown. Or maybe you’re just ready for something new. Try not to be influenced by what your friends are doing or a vision you have in your head. Instead, look objectively at your home right now. How much space do you use? Are you optimizing the space you do have?
Sometimes looking at the spaces in your home in a new way can help you find ways to make even better use of what you do have.
If you’re on the fence about the space in your home, you might want to look next at what kind of costs a bigger home will bring.
How will your goals be impacted?
A bigger home doesn’t just mean a more expensive mortgage payment. When you upsize your home you also tend to increase your taxes, repair costs, and utility bills. That doesn’t even factor in the cost of moving, like closing fees, home updates and paying movers.
Before you decide to move, look at your long-term financial goals and how they might be impacted by moving or staying in your current place. Maybe staying in your place means the kids have to share a room, but you’d have more money to afford home updates, vacations or better retirement savings.
Get really clear on the goals that are most important to you, and figure out how a new home would realistically fit in with that vision.
Know what you can truly afford before shopping around
There’s nothing wrong with deciding to upsize your home, as long as it fits in well with your overall financial plan and goals. But people get into trouble when they don’t fully understand what they can afford.
It’s important to do your homework ahead of time to know the absolute highest price you can comfortably afford, with lots of wiggle room for emergencies, unforeseen house costs and taxes.
Do not rely on a mortgage lender or a realtor to tell you what you can afford. Many of them are incentivized to push the maximum amount of house you can buy. That’s not to say they’re all looking to trick you, but they might push you to consider homes that you won’t be able to afford comfortably. Do the math ahead of time and really determine what you can afford realistically, while considering your lifestyle and how it might change in the coming years.
The traditional way that banks and lenders decide how much house you can afford is to use two ratios.
- Ratio One: Your gross monthly income (before taxes are taken out) x 28% = your monthly payment.
- Ratio Two (debt-to-income ratio): Car payment + student loan payment + estimated mortgage + any other debt payments = No more than 35-43% (depending on the lender) of your gross monthly income. You can use this Zillow calculator to get an idea of what this looks like for you.
Banks then work backward from these, taking interest rates and length of loan into account to figure out how much they are willing to lend you. The problem with this method is that it doesn’t take into account how much you can afford to pay per month for a mortgage payment (your personal budget) or how much money you can afford to put down upfront.
How much house can you afford?
Here’s a rule of thumb:
Your potential home payment should fit into the overall picture of Senator Elizabeth Warren’s 50/30/20 budget. That means that 50% or less of your monthly take-home pay should go toward fixed essential costs, like housing, a car payment, student loan payments, utilities, insurance, or anything else that is a necessary expense.
30% or less of your monthly take-home pay should go toward variable costs, like clothes, eating out, entertainment, personal care, etc.
And 20% or more of your take-home pay would then go towards savings or extra debt payments.
So have a good idea of what all of those costs are before you determine what you can actually afford.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes everyone should have access to financial resources and coaching. For more information on the services offered, contact Katie today.