Ask Brian is a weekly column by Real Estate Expert Brian Kline. If you have questions on real estate investing, DIY, home buying/selling, or other housing inquiries please email your questions to [email protected].
Question from Shelly in OR: Hey Brian, We are a family of four with the kids at ages 8 and 11. We’ve been in our first house for six years and know that it is getting way too small as the kids grow up. We are definitely going to buy a bigger house, hopefully in the next several months. In fact, we’ve already been talking to lenders and an agent. Life has been good so far. It turns out that we can afford much more house than we imagined. We qualify for almost 200% more than we had been discussing paying for our next home. It’s certainly good to have the option but we’re not sure it is a good financial decision to stretch our budget that far. On the other hand, a big part of the reason we qualify for so much is that the value of our first house has gone up a staggering amount. That tells us that investing in a big home could be a financial bonanza in the future. Something our agent told us is that for every additional thousand dollars we spend on our house, our monthly payments will only go up about $16 a month. What should guide our decision making?
Answer: Hello Shelly. It sounds like you have a problem that most people wish they had but that doesn’t make it any easier to decide what to do. The first thing I suggest is that you run the numbers yourself rather than relying on what your agent is saying. If you buy a house with a mortgage 200% higher, your monthly payment will double. For instance, a $200,000 mortgage at 3.2% will have a monthly payment of $865 (not including taxes and insurance). A $400,000 mortgage at 3.2% is going to have a monthly payment of $1,730. Mortgage calculators are your friend for understanding different scenarios.
But it is never only about how much you can afford to spend on a house today. When buying a bigger home, I believe in some solid long term financial planning. Start your new home buying journey by looking at how your spending patterns have changed since you bought the small house now that your income has grown into that house. After scrimping and saving to buy your first house, you’re probably spending more freely on your kids, your clothes, a better car, and maybe a few vacations. Hopefully, your income will continue growing for many years to come. More income will eventually make a bigger mortgage payment easier on your budget but it will consume more of your budget in the short term. Also, a bigger house can bring higher utility bills, more maintenance, and higher costs for insurance and taxes, so be sure to include these in your budget. Based on massive data and analysis, a good rule of thumb to start with is that the Consumer Financial Protection Bureau recommends a debt-to-income ratio of 43% or below (including your mortgage payment). If you buy too much house, you’ll have to cut back elsewhere right at the time you’ve come to enjoy some of the extras in life.
And then there is long term planning. How are you doing on your retirement savings? Shelly, you didn’t say what type of work you and your husband do but if you have a 401k plan, you want to be sure that you are collecting all of the money that your employer will match. In most cases, you can contribute more than what your employer matches. Should you be adding another 1% or 2% to what you are already saving (it will reduce your spendable income)? Remember, compound interest needs time to work its magic. The later you start saving, the less power compound interest will have. Do you have life insurance? A bigger home could mean leaving a bigger debt for your spouse to pay alone. By this time in life, you should also have emergency savings in place. Lots of long term financials to keep in mind.
I don’t want to be too negative but I do believe in looking at the big picture when it comes to a major purchase like a home. What are the plans for your kids’ college education? Are you planning to buy their first car? Help them buy their first home?
Don’t’ forget about enjoying other parts of your own life. What are your other dreams? A second honeymoon? A vacation home? Quitting a 9 to 5 job to start your own business? Other passions?
Shelly, don’t be too pessimistic either. Go for balance. Life is being good to you and you should enjoy as much home as you can reasonably afford. A larger, roomier home will provide more room for your growing family to spread out and make it easier to host birthday parties and family gatherings. If you are going to go big, now is probably the time while interest rates are at historic lows. A year from now, you might not be able to afford your dream home.
What guidance do you have for buying a bigger family home? Please add your comment.
Our weekly Ask Brian column welcomes questions from readers of all experience levels with residential real estate. Please email your questions or inquiries to [email protected].