Home & Garden

Trading up a bigger home without freaking out

With the U.S. employment picture gradually brightening, real estate specialists say more young families are now considering a move from their starter home to a larger property. Many such moves are spurred by a promotion or a salary increase.

“That means larger houses are selling well again,” says Tom Early, a real estate broker and past president of the National Association of Exclusive Buyer Agents (www.naeba.org).

Of course, not all families crowded in a starter home can afford an upward trade. True, far fewer homeowners are now “underwater” on their mortgages than in the aftermath of the financial crisis. Even so, Early says that in many cases, equity is still in short supply.

But the outlook is better for those who didn’t overpay for their first home and have gained appreciation in the last year or two.

“Many people who were conservative in their selection of a first home – and who weathered the economic storm that hit in 2008 without falling behind on their payments – are in a decent position to move now,” Early says.

“For people who own stocks, there’s also the ‘wealth effect' from the stock market rebound, which has made (prospective buyers) more confident about their finances,” says Eric Tyson, a personal finance expert and co-author of the “Home Buying Kit for Dummies.”

In addition, homeowners are often prompted to move up if their family size is increasing.

“There’s always the classic case of people starting a family and needing another room for the baby. That’s one of the most common reasons people want bigger housing,” Tyson says.

A growing family also means adults in the house may have had to surrender their use of a bedroom they used as a home office, to let the kids have their own rooms. But as Tyson notes, more people than ever want and need a dedicated home office space, especially if they telecommute at least some of the time.

What features do most young families seek in a trade-up property? Early says a large family room is typically near the top of the list.

“Anymore, most people don’t demand a formal dining room or a formal living room. They’re looking for space that’s comfortable and large in useful ways. A family room is nothing if it’s not big enough for that 65-inch TV,” he says.

But Early, a veteran of the real estate business, says experience has taught him that it’s critical for young families to approach a potential trade-up purchase cautiously. Here are a few suggestions:

Tyson cautions buyers against committing to a much more expensive home without first considering the long-term spending requirements.

“It’s not enough to know that a bank will let you borrow for a larger mortgage. You have to do some financial soul-searching of your own,” Tyson says, noting the frequent disconnect between the maximum sum a bank will lend and the amount a family can truly afford.

He advises those considering a move-up purchase to attempt to project their future financial needs. To make basic calculations, he recommends the free online financial planning tools available through such mutual fund companies as T. Rowe Price (www.troweprice.com) and Vanguard (www.vanguard.com).

Some who covet a bigger house are willing to personally handle all the cleaning and maintenance tasks they face. But beyond upkeep expenses, there are other costs to factor into your calculations.

“Are property taxes rising in your area, and what’s happening to your homeowners’ insurance premiums? You can’t overlook these indirect costs of ownership,” Tyson says.

In addition, he says, it’s necessary to take into account all the expenses involved with furnishing a larger property, as well as utility costs to heat and cool the place.

In recent years, home prices have recovered strongly in a number of popular neighborhoods, though in some cases price gains have recently slowed or stalled due in large part to ever-more-stringent mortgage lending standards.

Does that mean you can still find an affordable move-up property in a neighborhood that’s likely to appreciate in value in coming years? Tyson says the answer to that question depends on the strength of the local labor market and economy.

Early estimates that well over half his home-buying clients purchase as pricey a property as their mortgage lender will allow. But the rest undershoot their ceiling because they have other money goals as important as housing.

For example, he’s worked with clients who place as high a priority on family travel or on private-school tuition as on luxury housing.