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.
The Logistics of a Sizing Up to a Larger Home
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.
1. Can You Afford It?
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.
2. How Much Space Do You Really Need?
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.
3. What Kind of Accommodations Can You Make?
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.
4. How Much Can You Get for Your Current Home?
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.
5. How Long Will You Stay
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.
6. What Mortgage Lender Will You Use?
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.