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Getting a bigger home? Look beyond the mortgage

Greg McBrideReal 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.

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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.

For advice regarding your specific situation, please e-mail one of Bankrate.com's Q&A experts or visit the Personal Finance Advice channel on Bankrate.com.

-- Posted: June 13, 2003
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