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When you’ve found the home you want, you may feel like you’re ready to put in a bid and move forward. However, even after figuring out if a new location is a place you want to call home there are some big financial considerations that should probably be on your radar.
Two scenarios we tackle here focus on buying a new home before selling your current one and buying a second home (vacation home, rental property, whatever). Both may require carrying two mortgages, at least for some time.
This may not be your exact plan, but some of the considerations, like how this could affect long-term financial plans could apply for other situations, like if your next purchase is an investment property.
It’s a lot, but sometimes all you need is a starting point. Here are four questions that can help you get started.
You may feel comfortable with the mortgage process if you’ve already been through it at least once. However, you can expect a different experience if you plan on carrying two mortgages – one for the home you have and one for the home you plan on buying.
If you currently have a mortgage, that debt will be part of your debt-to-income (DTI) ratio. DTI is your monthly debt payments divided by your gross monthly income, and it’s a number lenders consider when deciding to offer you a loan. In most cases, the cutoff here tends to be around 43%. We’re flagging this because mortgages tend to be considerable sums, so if you already have one and it puts your DTI over 43%, you could be turned down.
Lenders typically require higher down payments for additional mortgages than they do for single ones. Down payments for a second home or investment property can range between 20 and 25 percent. This is for a combination of reasons, one of which is that you can’t use government-backed FHA loans for second homes. Another is risk, particularly with investment properties: lenders want owners to have more of their own money in these additional locations.
If you plan to buy a new home before you sell your current one, you may be handling a large amount of debt: Your current mortgage, a new mortgage, plus things like utilities and property taxes. Assuming your home sells quickly and at your asking price, calculating how much money you’ll need easy access to may feel fairly straightforward.
But what if the selling process drags on or you need to lower your price? It’s important to figure out how long your financial reserves can support owning two homes, even if temporarily. You may also want to calculate the minimum price you can accept for your current home, regardless of how high a price you put it on the market for.
Buyers looking to add a second home to their financial responsibilities will want to add up the estimated costs of managing two mortgage payments, two sets of taxes and the upkeep and maintenance costs for two houses for a sustained period of time.
If you’re selling your home, you may not have to make major changes. But the look and or/condition of your home can have an impact on the sale price. In this instance, we’re not necessarily talking about adding nice-to-haves like a porch. But you may want to address items buyers could use to negotiate a lower price like bad plumbing, old or unsafe electrical wiring, or a roof that needs to be repaired. A home inspection could help you get a sense of changes you may want to prioritize.
How much these things cost depends on what needs to be done. For example, Home Advisor says the average cost to replace plumbing is about $4.50 per square foot. If you have a 1,500 square foot home, that’s $6,750. Meanwhile, this same site says materials for the average roof repair costs between $353 and $1,453 (labor is extra).
At the same time, your new home could have its own sprucing-up costs. If you’ve identified your new or additional home, cataloguing changes you expect to make in the short term could provide a sense of your immediate spending needs. To fill out the list, consider if your new home has features that require regular maintenance and the related costs.
For example, if you’ve never had a pool before but your new home does, you can expect to spend around $3,000 to $5,000 a year to keep it in good condition.
You’re also going to want to closely look at property taxes. These can be different if you’re buying a home in a different state or buying it for a different purpose – for instance, different taxes may apply to secondary residences and rental properties. Talk to a tax professional so you’re aware of your responsibilities.
Whether you’re buying a home before selling your current one or purchasing a second home, it’s important to look at how and if your new home will alter your overall financial picture. For example, if you’re selling, you could end up with more money for travel, retirement and your grandkids’ 529s.
At the same time, moving and new upkeep costs could require reshuffling expenses for a period of time.
Knowing upfront how your new home fits with your overall financial plans could be worth considering before you decide to pull up stakes.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.