John M. Lee: Is It Time to Buy a Larger Home?

Is it time to buy a larger home? Have the children moved out, and are you considering purchasing a smaller home? Do you want to move to a better school district for your children? Do you want to move to a place with nicer weather? For whatever reasons people move, I have found that it is always a major decision in their lives.

Over the course of my career, I have counseled many people and have offered different advice for different situations. The following are some points to think through before actually reaching a decision to move.

One of the major factors is finance. Can you afford a home with a higher mortgage? Most people moving are looking for a bigger home, and thus probably a higher mortgage with larger monthly payments. Some of the reasons might be that their family is growing and they need extra bedrooms for all the kids; their parents are getting up in age and they want to live together; or they received a promotion and want a larger and more prestigious home. Whatever the reason, they are trading up and financing becomes an important element in the decision making process.

The calculations are simple enough. You can calculate the equity you have in your home (assuming you are selling it for the down payment) by estimating the market value of your home and subtracting the existing mortgage and closing costs, such as brokerage commission, transfer tax, prorated property tax and other miscellaneous expenses.

Next, estimate the purchase price of the trade-up home and calculate the amount of mortgage needed to buy that home. From there, you can use a financial calculator to figure out the approximate amount of the monthly mortgage. Add in a prorated monthly property tax and insurance amount and you have your approximate monthly housing expenses.

Chances are that when you first calculate this number, the first impression is that it's large and that there is no way you can or would want to pay this amount each and every month for the next 30 years. However, there is some good news in that the mortgage interest and property taxes are tax deductible, which makes the after-tax cost of owning your new home much more affordable.

Also, there are usually some other factors that might increase or decrease these numbers. Are you moving to a better school district so that your children can enroll in a public school so that you do not have to pay for private school tuition? Is your commute to work shorter because of the move? Are you closer to public transportation so that you do not have to drive all the time? These savings can help offset the higher payments incurred.

In our area, we are fortunate in that our properties appreciate quite rapidly and that we have a "problem" of having a $500,000 capital gain threshold for married couples and $250,000 for singles. Once our principle residences achieved such a gain and we sell it, the gain over the $500,000 or $250,000 becomes taxable at maximum federal capital gain rates of 18 percent and a California ordinary tax rate of approximately nine percent, for a total of 27 percent. Some people are making the decision to sell when their properties reach those gains to take advantage of the tax break. They can then reinvest the equity into another property and do it again.

After financing, other factors that come into play are better weather, a larger lot with backyard for the kids to play in and a better school district. These are more subjective and more difficult to assess because each situation and person are unique.

But whatever the reason, moving is one of the most stressful times in a person's life, so gather all the information possible and evaluate carefully before making a decision to trade-up.

John M. Lee is a top selling broker at Pacific Union specializing in the Richmond and Sunset districts. If you have any questions regarding real estate, call him at (415) 447-6231 or e-mail isellsf@aol.com.