Getting a bigger home? Look beyond the
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
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
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
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