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Getting a bigger home? Look beyond the mortgage
By Greg
McBride, CFA • Bankrate.com
 Real
estate has appreciated strongly for several years, leaving many homeowners sitting
on a pile of home equity. With mortgage rates at 45-year lows, many of those
same homeowners are looking to parlay their home equity and the current low
mortgage rates into a larger home.
But be sure to look before you take the leap, as your budget will
be affected by more than just the new mortgage payment. Many items within the
monthly budget may be subject to revision with such a move.
If there is a downside to steadily increasing home prices, it
is higher property taxes. With many local governments in a budget pinch, property
taxes have taken on increased importance. Cash-strapped cities are filling the
coffers with property tax proceeds, either through appreciation in home prices
or by boosting tax rates. Home buyers who pay a premium above the assessed value
are not only paying higher mortgage payments, but also higher property taxes.
In states with a cap on annual property
tax increases, such as Florida, home buyers can find themselves on the receiving
end of an unpleasant surprise. Upon the sale of a home, the new owner pays property
taxes assessed on the market value of the home, which can be substantially higher
than the cap-restrained assessed value that served as the basis for the previous
owner's taxes. What often results is a substantial increase in property taxes
over what the buyer paid in the prior home, and over what the seller was paying
in the same home.
Consider, for example, the case of a home
that was sold four years ago for $150,000, and just sold again today for $225,000.
If annual property tax increases were capped at 3 percent, the former owner
paid property taxes based on an assessed value of approximately $168,800. The
new owner will pay property taxes on the newly set value of $225,000 -- an instant
jump of 33 percent. If that former owner had upgraded the home to where it sold
for $300,000, its sale would have generated a property tax increase of nearly
78 percent -- which makes a lousy housewarming gift for the new owner.
While rising property taxes alone may
prevent some homeowners from upgrading to a larger home, there are other factors
to consider, too.
Property insurance costs have also been
skyrocketing in many parts of the country. Claims liability is one reason, but
increased premiums are also a result of insurance companies' suffering investment
portfolios in the wake of a three-year bear market. A move to a larger home
means a larger policy and larger payments.
A move to another, larger residence can
also mean increasing utility costs. With more square feet of home space to keep
cool in the summer and warm in the winter, and the pronounced volatility in
energy prices recently, factor in a corresponding rise in utility costs in the
new home.
Also consider the budgetary impact in
other seemingly insignificant areas. Even in a local move, a different ZIP code
may affect auto insurance rates. A longer drive to work means higher commuting
costs and greater wear and tear. Does the new residence have any type of homeowner's
association or other dues? If so, how do they compare to the current residence,
and what do you get for it?
Low mortgage rates mean home buyers get
more house for a given monthly payment. But as demonstrated by the other expenses
of homeownership, it is important to look beyond the mortgage payment and consider
the other financial factors that affect your budget. Evaluating the entire monthly
budget is the true gauge of whether a newer, bigger home is truly affordable.
Greg McBride is a financial analyst for Bankrate.com.
-- Posted: July 1, 2003
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