Joe & Kristin called me one afternoon and wanted to chat. They were recently married and hoping to finally be able to upgrade their life a little. They were ready to move on up to a bigger house.
Kids were in their future and they weren’t able to fit all of their wedding gifts in their current house. So, they wanted to bounce the idea off of me, their financial advisor, to see if this upgrade made sense for them. And it is something that many others outside of Joe and Kristen consider every day.
A recent Trulia housing study found that 60% of people ages 18-34 are wanting to upgrade their home… to a bigger home. And it doesn’t stop just in that age group. Nearly 50% of individuals between 35-54 wanted to upgrade to a bigger home as well.
Let’s take a look at Joe and Kristen’s current financial state. They both received their college degrees and Joe decided to pursue a second degree. This ended up costing more than he was able to cover at the time and thus accumulated about $50,000 in student loan debt.
Joe has been able to aggressively chip away at this debt, but it’s still substantial. And after talking through current cash flow for the household and the costs associated with upgrading to a new home and then ultimately paying the monthly bills for such, they determined to hold off on the upgrade.
Joe & Kristin decided to focus on paying off their current debts aggressively and then looking to upgrade their home in 18 months, which would continue to suit their life goals of kids and growing a family.
What would it take for Joe & Kristin to finally get the upgrade they have always wanted? Here are 7 things to consider when faced with the desire to upgrade your house.
- Financially Able – This would be the first thing a financial advisor would say… but it is the reality. Joe & Kristin were not financially able to upgrade their home. They had too much debt with student loans. But this debt could include other consumer oriented debt like credit cards. We like rules of thumbs at Wela, they help to better understand boring and complex financial ideas. Here is one that helps to determine whether you are able to upgrade.TSL – This stands for taxes, savings and life. The idea here is that you should look to spend 30% of your income on taxes… this includes all types of taxes (federal, state, etc.). 20% of your income should be put towards savings… this includes your company 401k or 403b, a Roth IRA account or other type of investment account. And then 50% of your income should be used for life. This includes all the pleasantries… along with a house. If you find yourself living by TSL, then it may be an ok time to upgrade your house.
- Make it 20% – Here is another fun rule of thumb. We want to keep our mortgage payment below 20% of our income. So, if we are making $100,000 per year (household income), then we will want to make sure that our annual mortgage payments don’t exceed $20,000. So, for example, if you see your mortgage payment drop to 15% of your income (because you got a raise or combined incomes) then it could make sense to make an upgrade of your house. And the amount of the upgrade would be to get you back up to having a mortgage that is 20% of your income.
- Know the Market – This doesn’t necessarily mean you need to know whether home prices are rising or falling. A rising home price market could mean that you are having to spend a little more for that new upgrade… but you are getting more for your home that is for sale. This idea is more geared towards know the interest rate market. Where are rates… mortgage rates that is. If we are in a period of time with mortgage rates rising rapidly and they are drastically higher than recent history, then it may not be an ideal situation. But a situation like today’s environment with mortgage rates low and in line with recent history, it may be a good opportunity to borrow money for cheap to buy your home upgrade.
- Gaze into Your Crystal Ball – Think about what your life is going to look like 3, 5, even 10 years down the road. What financial obligations could arise and will you still be able to afford your upgraded home when they do. Joe and Kristin were determining how much home they could afford based on their combined income. But what about when they have kids? If Joe or Kristin decides to leave work and stay at home will the single income support the new cost of kids along with the mortgage on its own?
- Lifestyle – Upgrading your home may not always mean that you have to upgrade the square footage of your house. Sometimes it means upgrading your lifestyle by getting in different new house. An hour commute each way to work can wear on you. Or finding a public school system that fits the bill or allows for your kids to walk to school. All of these enhance a lifestyle (and could reduce costs), but these situations can all lead to it being time for an upgrade… in lifestyle. By getting a new house that relieves some of these wearing attributes of your lifestyle today.
- Growing In – There is a common thought that we should look to “grow into” a house as opposed to “out grow” a house. If the plan is to grow your family, then looking to upgrade your house for a bigger family could make sense if other conditions align positively for you. This is a bigger point if you are determining between two different housing options in an upgrade, remember that it is better to “grow into” a house as opposed to “out grow” that new home and have to be on the market again in just a couple of years.
- The No Move Upgrade – Maybe you don’t have to upgrade to a completely new house, but your current property provides you an opportunity to upgrade your house. You may be in a situation where you need more space because people are stepping on each other’s toes, but you like the location… look to add on a screened in porch or a sunroom to expand your kitchen space. Or maybe you have that basement which spooks the beans out of you… look to create a welcoming environment down there and build it out. This is a way to upgrade your situation without having to relocate yourself.
Upgrading your humble abode is an exciting event. It can provide people a sense of taking their “next step” in life and owning a home is the American Dream. But it is also, likely, your biggest purchase of your life. And just like we made sure buying a home was a good financial decision with our first home, we need to make sure that upgrading a home (and increasing our costs) is the right financial decision.
Many things go into determining whether upgrading your home is the “right” thing, but ultimately it comes down to whether your current financial situation allows for you to do so and that you are able to take on an added cost with out putting your future financial situation at risk.
Joe & Kristin made a decision to focus on solidifying their financial situation before taking on more costs for their home. They decided to focus on paying down debt, before incurring more debt.
Anyone has the opportunity to upgrade their home. But doing so may just mean planning and focusing on getting the financial foundation needed to do so.
As a founding partner of Wela a digital financial advisor, and Portfolio Manager, Matt Reiner coordinates the Investment Committee and translates the decisions into trades and allocation adjustments within the Wela Models. Matt also serves as an Investment Advisor and the Chief Investment Officer for Capital Investment Advisors (CIA). Outside of work when Matt isn’t spending time with his wife and their puppy dog, you can typically find him on the golf course or coaching his little league baseball team.