Smart Buying
Time to Move On?
Dramatic price drops are unlikely, but many homeowners are taking their profits anyway.
By Pat Mertz Esswein, Associate Editor
Dave Lindorff
From Kiplinger's Personal Finance magazine, November 2005
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Financially, the key to a successful move up is not to lose your perspective, says Bryan Totri, a financial planner in Marietta, Ga. Unfortunately, says Totri, a few buyers get carried away. "For some people, it's numbers be damned," he says. "They come to me and say, 'I've got a good feeling. I'm clearing out my investment portfolio to come up with more cash, and I'm taking out an interest-only loan.' " Don't get overextended. If you have to squirm to make a deal work, "that's a no-no," says Totri.
One critical number is how much equity you have in your current home. Chris Mygatt, president of Coldwell Banker Residential Brokerage of Colorado, in Denver, says that agents often encounter would-be sellers who are stunned to find that after multiple cash-out refinancings, they can afford to pay off only the mortgage on their current home when they sell it, with nothing left over for a down payment on a new one.
Another crucial figure: your new home's property tax, which may be sharply higher. In Florida, for example, property-tax increases are capped at a maximum of 3% annually for owners who are full-time residents. But when a home is sold, the new owner gets hit with the full impact of property taxes based on the home's current value. John Carrig, the financial planner in Deerfield Beach, Fla., thinks that deters some move-up buyers -- including one of his clients, who chose not to move to a bigger condo when she realized her property taxes would increase from about $2,000 annually to $9,000.
But the numbers worked for Lauren and Allen Gardner of Vienna, Va. -- a place proudly described by residents as having been a "real" town before becoming a suburb of Washington, D.C. The Gardners moved there with their two sons, Mason and Max, in 1998, when they purchased a 1950s rambler for $187,000. Four years later, they had another son, Collin, and wanted to move up to a bigger place. "We'd had better-than-expected appreciation on our home, we needed the space, and the opportunity kind of presented itself," says Allen, 37, a lawyer whose practice is prospering.
While scouting around Vienna, the couple fell in love with a home built by a local developer who designs one-of-a-kind houses with traditional styling and front porches. Based on a pencil sketch, they purchased a to-be-built 4,000-square-foot house, with four bedrooms and four and a half baths. It came with an implicit warranty -- the builder lives right around the corner.
The Gardners sold their rambler for $340,000, taking away about $150,000 in equity. They paid $900,000 for the new house, with $90,000 down, and financed the balance with two loans -- a 30-year fixed-rate mortgage ("no goofy loans," says Allen) for 80% of the balance, and a second mortgage for the remaining 10% to avoid PMI. The first loan has an interest rate of 5.5%, and the second, 6.5%.
The Gardners used most of their remaining equity to set up a reserve fund. Says Allen: "We asked ourselves, What if something goes wrong financially or we have some catastrophic expense?" They also set aside money to furnish the house and install a fence and a shed.
The family loves the new house, especially the front porch. "I can't believe how much time we spend out there watching the kids play in our cul-de-sac," says Lauren, 36, a former lawyer who quit her job to stay home with the children. And now there are more of them to watch. The Gardners' fourth son, Mitchell, was born several months after they moved.