Don't Let Trading Up Pull You Down
by Ellen Katz
Mortgage interest rates are at their lowest in nearly two years, so you may be thinking it's a good time to trade up.
But think long and hard before you decide to buy a bigger, better home. It could put you in the poorhouse.
Refinancing a mortgage can be a money-saver, but buying a new house is packed with hidden costs. And real estate profits aren't nearly as spectacular as they used to be in the 1970s and 1980s.
For our parents, investing in real estate was pretty much a sure bet. It was nearly impossible to match anywhere else the kinds of profits you could make on a house.
And you may already have benefited from more recent run-ups in real estate prices, depending on when you jumped into the market. My husband and I bought our first starter home in 1987 for $100,000 and sold it a year later for nearly $140,000. Not bad, considering that the down payment, closing costs and mortgage payments for the year totaled only $20,000.
Those days are pretty much over, and yet conventional wisdom continues to try to convince us to buy the biggest house we can afford with the largest mortgage possible.
At today's lower rates, a 30-year fixed rate mortgage is just under 7 percent, down from more than 8.5 percent a year ago. The lower cost of a home loan lures people into stretching to buy more expensive houses than they could afford just a year ago.
The monthly payment on a $300,000 mortgage would be about $1,970, compared with $2,250 last spring. Depending on your tax bracket, Uncle Sam can make the after-tax cost even less.
So far so good, so you're wondering, "What's the problem then?"
The other costs of "trading up" are expensive. If you sell your current home through a real estate broker, the commission's going to eat up as much as 6 percent of the sales price. On a $200,000 house, that could set you back $12,000.
Then, when you take out the new mortgage you'll have to pay "points" of from 1 percent to 3 percent of the loan amount. Let's say you get one and a half points, that's $3,750 on a $250,000 loan. After shelling out a variety of other fees for title insurance, filing applications, inspections, appraisals and credit reports — you could be out anywhere from $18,000 to $35,000.
You're not finished spending yet. The mailbox of your bigger house will be full of higher bills for insurance, maintenance and real estate taxes. And don't forget the hundreds of dollars you'll pay to move out of the old place and decorate the new one.
If you still want to buy after looking at the price tag for trading up, make sure you choose a house you'll stay in for a long, long time. The exorbitant process of buying and selling real estate is not something you want to repeat again soon.
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