Are You Ready to Trade Up? How to Think About Buying a Bigger House

When you add water to a bucket, the level rises uniformly, not just in the area where you pointed the spigot. The real estate market behaves similarly: when the price of your home increases, so too do the prices of other homes in your area.

How many sellers are looking to trade up?
According to the National Association of Realtors, sellers looking to trade up still make up the largest group of repeat home buyers.

If you’re looking to sell your home so you can buy a bigger or nicer home, you need to be extra savvy with your money. You’re also going to need help from a good real estate agent.

Richard Schulman, a top real estate agent in Los Angeles who ranks #10 for condo sales out of 31,489 agents in the area, says “my goal is to help our clients achieve success in the real estate market” and the most common call he receives is someone saying, “I want to buy a bigger house.” What that means for you is unique to your needs and financial situation.

Start your conversation with an agent by discussing why you want to trade up. Be specific and give them as much information about your lifestyle and finances as you can. To prepare for this discussion, you’ll need to do some basic math. Let’s play a simple game to help you figure out how much trading up would cost and if saving up might be a better option.

Trade Up or Save Up “Game”

Objective – Arrive safely at Final Decision Haven with a completed Tally Sheet.

Game Summary

– Trade Up or Save Up is a game of strategy and patience. You are a home seller who wants to trade up to a nicer home or neighborhood. To succeed, you must follow directions, heed the advice of Experts & Data, and plan carefully. Take your time to avoid dangerous territories like House Poor Valley and No Budget Dungeon. Use the Tally Sheet to track your progress; once it’s filled in, consult your real estate agent and enjoy Final Decision Haven.

Let’s begin! Use the Tally Sheet at the bottom of the post to record your calculations.

Stop 1: Mortgage Comparison

The first line in your Tally Sheet is for the most significant piece of information: your monthly mortgage payments. Pull up your most recent mortgage payment to verify your current payment, and use this mortgage calculator to estimate the payment on a more expensive property.

Freddie Mac's Primary Mortgage Market Survey
Source: Freddie Mac’s Primary Mortgage Market Survey

Strategy Tip 1: Don’t underestimate the importance of mortgage interest rates in your calculations. While interest rates continue to vary month-to-month, they’ve “been at or below 3.5% for 14 straight weeks, which is just the second time that’s happened in history” according to The Mortgage Reports. Freddie Mac reports this sustained trend in its monthly Primary Mortgage Market Survey:

Strategy Tip 2: If you’re looking to trade up, now is a great time to shop around for a mortgage. The Mortgage Reports says, “Because of how mortgage rates have dropped, if you could afford a $400,000 home in January, today, you can afford a home for $422,000 — an increase of 5.5% to your purchasing power.” Get a written quote from three or four lenders before choosing one that fits your budget.

Stop 2: Property Tax

Your next calculation is closely related to the first. Property tax is based on the fair market value of your home and taxes levied by your state and local government for things like schools, infrastructure, and public safety.

Here’s what property taxes look like in each state:

What property taxes look like in each state
Image via Core Logic

To get a rough estimate of the property tax on a new home, do this calculation:

Purchase Value X Local Millage on Property = Property Tax

Your local government should have online resources available through the Assessor’s Office that show the millage you are/will be paying.


EXPERT ALERT!
Your real estate agent is the best resource for accurate estimates on property tax since they know the areas where you’re selling and buying. They’re also equipped to point out potential exemptions and tax credits.


Strategy Tip: If you prefer concrete numbers over estimates and want to know how assessors arrive at your tax rate, read through Smart Asset’s breakdown of property tax.

Stop 3: Income Taxes

There’s a silver lining to higher mortgage payments and property taxes! The Tax Policy Center confirms, “Homeowners may deduct both mortgage interest and property tax payments as well as certain other expenses from their federal income tax.” To get an estimate of what your deduction would be with a trade up home, do this calculation using the new home’s information:

(Monthly Property Tax + Monthly Mortgage Payment) X Current Federal Income Tax Bracket = Income Tax Deduction

Most states also allow you to deduct your mortgage interest and property taxes on income tax returns.


EXPERT ALERT!
For information on other potential tax savings, ask your real estate agent to connect you with a good real estate tax advisor. They’ll lay out how the impact of a trade up home can determine income tax rates and other scenarios you should consider before financing a more expensive home.


Strategy Tip: If you realize any capital gain from the sale of your home, you can exclude that amount (up to a limit) from your income (Tax Policy Center). Ask your tax advisor about this as well.

Stop 4: Utilities

If you’re trading up in roughly the same location, calculating the utilities on your new space should be easy. Plan on your phone, internet, and cable staying the same. Since you won’t be able to request hard numbers on your new home until you’ve found it, estimate the other utilities based on the increase in square footage you desire. Do this calculation to figure it out:

Current Utilities X % of Increase in Square Footage = New Utility Costs

Utilities you should take into account include: electricity, gas, water, sewer, and trash and recycling. Each municipality contracts with providers differently, so check their websites or ask your real estate agent for utility costs specific to your area.

Strategy Tip: Investing in energy efficiency can save you money on utilities over time and may qualify you for tax credits. Some of the categories the IRS gives credits for are:
· Appliances
· Insulation, windows, and heating and air conditioning
· Solar, wind, geothermal, and fuel cell systems

Here’s the tax form your advisor will likely point you to:Tax forms your advisor will likely point you to

Stop 5: Homeowner’s Insurance

As with utilities, the cost of your homeowner’s insurance on a trade up will be specific to your new home and can be estimated using your new home’s square footage. Complete this formula to determine your new payments:

Current Homeowner’s Insurance X % of Increase in Square Footage = New Homeowner’s Insurance Costs

Strategy Tip 1: Shop around for homeowner’s insurance. Get at least three quotes and take into consideration policy price, coverage, and customer service reviews. Also, your current insurance company may offer a discount for carrying multiple policies with them.

Strategy Tip 2: If you install a central monitoring security system, most insurance companies will give you a discount on your homeowner’s rates. Be aware, however, that this discount won’t pay you back for the monthly costs of the system. In general, install the security system if you’re looking for peace of mind and take the discount as an added bonus.

Stop 6: Maintenance

The cost of upkeep on a new home – trade up or otherwise – is one of the trickiest numbers to nail down. You won’t know the condition of the new home or its added features until you’ve had it inspected. In the meantime, assume that your maintenance costs will increase and use this calculation to estimate a number for your budget:

Target Purchase Price of New Home X 1% = New Home Maintenance

Strategy Tip: If you’re in search of an older or historic home, use 1.25% – 1.5% for your estimate.

Tally Your Costs

You’ve made it through the mathematics of Trade Up or Save Up. Use this tally sheet to record your findings:

TRADE UP OR SAVE UP TALLY SHEET
Costs Current Home Trade Up Home
Mortgage Payment
Property Tax
Income Tax
Utilities
Homeowner’s Insurance
Maintenance
TOTAL

To complete your estimate for what trading up will cost, do one final calculation:

(Trade Up Home Costs – Current Home Costs) + (Down Payment – Proceeds from Sale) = Estimated Cost to Trade Up

Final Destination: Trade Up

Compare your Estimated Cost to Trade Up to the savings you have available. If you’ve experienced a recent windfall or have been stashing away savings, the cost to trade up could be manageable. You’ve reached Final Decision Haven and can Trade Up!

Final Destination: Save Up

If, however, your savings and Estimated Cost to Trade Up are significantly off, you haven’t quite finished our game. It’s time to make a savings plan.

Save Up to Trade Up

The largest upfront cost of a bigger, nicer home is the down payment. To calculate how much you will have available for that, do the following:

(Projected Proceeds from Sale + Available Savings) – (Remainder of Current Mortgage + Closing Costs) = Down Payment Amount

The type of loan and your mortgage lender will determine how much home you can get with the amount you’ve saved.


EXPERT ALERT!
Ask your real estate agent to connect you to two experts: a financial advisor and a tax advisor that both have real estate expertise. While you may be tempted to accept a mortgage from a lender who only wants a 5% down payment, this is a very slippery financial slope. Ask your advisors what amount makes the most sense for your financial picture.


Most likely, you’ll need to create a savings plan and stick to a budget to gather funds for a bigger mortgage. To get started, track your spending for 3-6 months. Ask yourself if there are any areas in which you can tighten the reins and squeeze a few extra dollars into savings.

Be cautious here – trading up should never be a reason to compromise other savings goals like retirement or college tuition. A financial expert can help you find areas where you can spend less and save more without risking your future.

Final Strategy Tip: Use Your Agent
Regardless of which Final Decision you arrived at, a real estate agent is your best resource when it comes to finding a home that meets your needs and is within your price range.

Dale Boutiette, a real estate agent ranked in the top 2% of agents in the area, says he has one client he’s been working with for four years to find the perfect fit. Another agent approached the client and “nearly choked” when he heard that, “then he laughed and said he’d never work with someone for more than 2 months.” Boutiette confirms that by focusing on his clients’ goals, he builds loyalty, which in turn brings him success.

A good real estate agent is never going to push you into purchasing a home that doesn’t fit your budget or needs. You’ll know you’re in good hands if your agent puts your needs before their commission.