2 reasons to skip homebuyer credit

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Have you thought of trading up to a bigger home, especially in light of the new $6,500 homebuyer tax credit? If your house is bursting at the seams with family and extra stuff, you’re probably tempted to make the leap to more spacious digs.

And why not? Today’s real estate prices are rock-bottom, financing rates are low and you might qualify for the tax credit.

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“This might be the cheapest time to move up, all things considered: housing prices, interest rates and the tax credit is like a cherry on top,” says Carolyn Warren, a mortgage and credit expert based in Seattle, and author of “Homebuyers Beware: Who’s Ripping You Off Now?”

“If a person waits a year or two, who knows where the rates will be?”

But unless you absolutely have to move because of a job relocation or another reason, some experts suggest a better idea: staying put in your crowded house.

In fact, making do with the limitations of your current home is one of the smartest ways of staying out of debt and saving money, says Deborah Knuckey, author of “Conscious Spending for Couples” and a real estate agent based in Bethesda, Md.

“I’m a Realtor and shouldn’t be talking people out of buying a home,” Knuckey says. “But people need to understand some of the costs associated with these kinds of moves, and how it will impact their finances for many years to come.”

Following are two good reasons to skip the tax credit and not trade up to a bigger and better house.

High cost of trading up

People who trade up to more expensive homes can spend a whopping 10 percent of the value of the new home in transaction costs and taxes, not to mention moving costs, Knuckey says.

Moving from a $300,000 house to a $500,000 house will cost you $50,000, Knuckey says.

Costs and fees on the selling and buying side may include taxes, insurance, appraisals and more. Plus, there are hidden expenses most people don’t think about, such as new furnishings, and higher heating and electricity bills.

“People forget that (getting a new mortgage means) you start the clock over on a 30-year fixed mortgage,” says Julie Murphy Casserly, a Chicago-based Certified Financial Planner and author of “The Emotion Behind Money.”

“Many people in (their) 30s and 40s are taking out 30-year fixed mortgages (that) won’t be paid off until they are in their late 60s or 70s,” Casserly says.

The decision to purchase a larger house needs to depend not on the appeal of bigger closet space, but on your personal cash flow, Casserly says.

“Can you handle an increase in payment above your current cash flow — regardless of the $6,500 credit opportunity?” Casserly asks.

She says that if moving to a bigger house will risk your children’s college fund or your own retirement, or deplete your emergency cash reserves, you simply can’t afford it.

Job and income instability

Even if the stars are aligned for a leap to a larger home, remember that in the end, it all comes back to numbers. For too many people in today’s tough economy, the math just doesn’t add up.

“The wise homeowner will look at both income and job stability before deciding to move up,” Warren says. “In our current economy, no one should stretch themselves too thin. That was a common mistake in the boom years, and I think we’ve all learned from that.”

The biggest consideration should be the impact trading up will have on your cash resources and current lifestyle.

“Too many people ignore the resulting loss of short-term savings or make concessions about lifestyle they are unprepared to follow through on after the purchase,” says Ethan Ewing, president of Bills.com, an online personal finance portal based in San Francisco.

“If, after these calculations, a family is losing their six-month cash cushion or essentially becoming ‘house poor,’ they need to reconsider or evaluate alternatives.”

There are some “good reasons” to trade up to another house right now, Knuckey says. These include having a very large family (or extended family living with you), a desire for a safer neighborhood or the need to find a better school district for your children.

However, “these reasons don’t include wanting a formal dining room or an extra guest room that you only use a few times a year,” Knuckey says.

Remember, there’s nothing wrong with staying in the same house all your life, Knuckey says.

“People who are wealthy — who you don’t think are wealthy — are doing that,” says Knuckey. “You can save a tremendous amount just by staying put and occasionally upgrading some things in your house as you need it.”