4 Ways to Save Money on a New House
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4 Ways to Save Money on a New House

  • Find the right loan by starting with knowing your credit.
  • Consider potential home maintenance and repairs before choosing.
  • Spend less than 28% of your income on a mortgage.

With spring well under way and interest rates still low, you might be dreaming of the day you upgrade your current home. If you call your realtor to inquire, they’ll almost always say it’s the perfect time to buy. And, why shouldn’t they? {Related: Spring is Open House Season}

Before you put that sign in your yard, however, it’s important to take a holistic look at your potential real estate purchase. No matter why you’re considering an upgrade, it’s important to know the financial consequences of buying a bigger and better home – and not just for the short-term, but for the long-term as well. {Related: Why Real Estate Should Be Part of Your Retirement Strategy}

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Plus, how do I save for a downpayment? What should you look for in a new home? And most importantly, how much should you spend?

We spoke to several realtors and real estate professionals to get timely answers on all of these questions. Here’s what they said.

Upgrading Your Home: How To Know It’s Time

If you’re already thinking about upgrading your home, you probably have good reason. According to realtor Suzy Minken of Keller Williams Premier Properties in Short Hills, New Jersey, most clients who upgrade do so because they are either busting at the seams with kids and toys, finally realizing their starter home kitchen is too small, or in desperate need of another bathroom.

Most clients who eventually upgrade need a house they can “grow into,” says Minken. “They envision themselves in a house they can stay in forever.” And once they decide their current home isn’t it, they make the decision to shop around.

Other reasons to upgrade may have more to do with changing needs.

“When you purchased your starter home, your life, and lifestyle and needs were very different from what they are now,” says realtor Michael Fisher of Orange County, California. “Newlyweds may limit their first home purchase based on transportation needs and proximity to work and don’t often think about schools.”

Or, perhaps it’s your earnings that justify the purchase of a larger and better home. Where your salary might have been on the lighter side when you bought your first house, your peak earning years might have changed your financial situation quite significantly. And with more money to spend, an upgrade to your home might be your #1 priority.

Your Upgraded Home: How Much Should You Spend?

Whatever the reason, it’s crucial to make sure your dream lines up with the reality – as in, can you truly afford to move up? While realtors might show you any house of your choosing, it’s the bank – and your own finances – that will dictate what you can actually afford.

While rules can vary slightly depending on the institution that lends you money, most lenders want you to spend less than 28% of your income on a mortgage, and less than 36% of your income on all debt payments combined.

If you have a household income of $100,000 per year, for example, most banks want you to spend less than $3,000 per month on all debt payments – that includes your mortgage, plus car payments, student loans, child support, and all of your other financial obligations as well. If you’re unsure how exactly to arrive at that figure, this calculator from Market Watch can help.

Of course, interest rates play a role in affordability as well, and today’s low interest environment continues to be a motivator within the housing market. According to Freddie Mac, the current fixed-rate 30-year mortgage is hovering around 3.75%. As interest rates rise, so do housing payments, and thus, the amount of home you can afford to buy goes down.

But, should you spend every dollar the bank will loan you? Most experts say “no.” In reality, only you know what you can and cannot afford, and you’ll want to factor real life into the scenario as well.

“The most important thing is to look at your budget and see what you can realistically afford for a mortgage payment,” says Kylee Della Volpe, editor and contributor for Mortgages.com. In addition to the monthly payment, Volpe notes the importance of factoring in additional expenses like taxes, heating and cooling costs, and incidentals.

“Finally, be sure you can put some money away for unexpected home expenses,” says Volpe. “Pipes burst, roofs leak, and driveways crack. We can’t always control it, but we can be prepared.”

What To Look For In A New Home

The type of home you’re looking to upgrade into will depend on a wide array of factors including your personal tastes, your housing goals, and whether or not you have kids.

“Be sure to think long-term,” says Volpe. While you want a house that solves your immediate problems and needs, you want something you could potentially grow into. Here are some factors to consider as you gear up for your search:

1. Pay attention to the school district – whether you have kids or not.

“If you have kids, be sure it’s in a school district you’re comfortable being a part of,” says Volpe. If you plan to send your kids to private school due to a poor school district, you’ll need to factor in those costs.

And even if you don’t have kids, you’ll want to think about the school district anyway. According to real estate site Trulia, homes in good school districts tend to hold their value better, even through a market turndown. The bottom line: whether you have kids or not, buying in an area with good public schools can bolster your investment.

2. Don’t forget about resale value.

To find a home that will hold its value, it’s crucial to consider how other people might see it. “It may sound too simple, but what appeals to you will also appeal to the next buyer,” says Fisher. If you’re bothered by a busy street or a bad school district, then reselling your home will be difficult because your buyer will consider these negatives as well.

3. Look for upgrades that appeal to you and other buyers.

Since houses are built differently all over the country, it’s impossible to come up with a list of upgrades every buyer should look for in every home. In the warm southwest, for example, you might look for a completely different home than they would in say, Boston.

Still, some assets are always a good thing, says realtor Scott Browder of Wilkinson Real Estate in Charlotte, North Carolina. A garage and ample storage is a good start. “In a garage, make sure your cars fit as builders these days seem to think that you will put junk in one side and a half a car in the other,” says Browder.

Browder also says to look for a home with ceiling height, as taller is always better. Plus, “8 foot ceilings are the kiss of death,” he says. Other features people look for these days include an open floor plan and outdoor living space, such as a yard or a deck.
Whether you have kids or not, plenty of bedrooms is ideal – at least to the point where it doesn’t detract from living space.

4. Consider maintenance and repairs.

While it’s reasonable to expect a home to need some repairs, some problems might be too big to bear. Foundation problems, for example, can cost tens of thousands of dollars to repair and make a home much more difficult to resell.

In addition to watching out for big (read: expensive) problems, you’ll want to make sure any home you’re interested in has been properly maintained. Anyone who has purchased a home before knows how important routine home maintenance is if you want to keep everything in good shape, and how quickly a home can go downhill is neglect has settled in. If the gutters haven’t been cleaned and the furnace filter hasn’t been changed, watch out. That could spell problems to come.

Bonus tip: If you have champagne tastes and a beer budget, it might be wise to consider a fixer-upper. “That way you earn sweat equity and can afford a home in what would otherwise be out of your price range,” says Fisher. And if you can do most of the work – or at least the easy work – yourself, that’s all the better.

How to Find the Right Loan

With interest rates playing such a huge role in affordability, it’s crucial to find a lender that can offer a product with the best rates and terms. That all starts with knowing your credit, says Volpe. “Start by getting your free credit report at annualcreditreport.com and check for errors,” she says. “Once you’re happy with your credit report, don’t go with the first lender you talk to. Shop around and see who is willing to offer you the best rate.”

According to Browder, you should talk to at least three lenders, and approach your bank to see what they can offer.
Also consider the different types of loans that might be available, including fixed-rate, adjustable-rate, and even exotic loan products.

“I would get at least 5 scenarios from 5 different lenders and ask each lender to go through the pros and cons,” says Browder. You should educate yourself not only on the types of loans available, but how each one might benefit you, he says. Just because your parents always had a fixed term loans, doesn’t mean it’s the right loan for your situation.

“You’ve got to stay educated and informed.” Says Browder, adding that you should never be scared or intimidated by your mortgage broker. “This is the biggest purchase of your life and the best way to stay leveraged,” he says.

The Bottom Line

When you’re ready to upgrade for any reason, do as much research as you can. Not only should you figure out how much money you can truly afford, but you should talk to a realtor about your local real estate market as well. Knowing whether it’s a buyer’s or seller’s market in your area is key, and that’s something you can easily find out by speaking to a professional and watching local sales in your area. {Related: Advice for Choosing the Right Realtor to Sell a Property}

Whether you need a larger home for your growing family, simply want a change of scenery, or feel you have the funds to move up in the world, upgrading from a starter home is a big deal – and one you might celebrate, or live to regret, for decades to come. Don’t jump into the decision lightly.

How did you decide it was time to upgrade your home? Was your decision a financial one? Or, did you simply need the room?

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Holly Johnson is a financial expert and award-winning writer whose obsession with frugality, budgeting, and travel plays a central role in her work. In addition to serving as Contributing Editor for The Simple Dollar, Holly writes for inspiring publications such as U.S. News and World Report Travel, Personal Capital, Lending Tree, and Frugal Travel Guy. Holly also owns two websites of her own - Club Thrifty and Travel Blue Book. You can follow her on Twitter or Pinterest @ClubThrifty.
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