Thinking of buying your next home? Here’s what to consider

Like many of you, I’m currently living in my first home. It’s been three and a half years since my husband and I handed over a big check during closing to get the keys to our own little piece of the American dream.

This first house has been good to us, and we’ve made so many memories here. However, our kids are getting bigger, and it’s starting to feel small. We have twins, and we moved here when they were just two years old. At that time, their two little toddler beds fit nicely in their shared bedroom. Now, they’re big school-aged kids, and things are getting cramped.

As a result, I know we won’t be in this home forever, but we’re not quite ready to buy our next house just yet. We’ve weighed the financial pros and cons of moving, and right now, we plan on staying in our home for a few more years.

It’s important to know what your current house is worth. If you’ve lived in your house for a few years, the value of it might have changed since you bought it. Homes typically appreciate over time, but it depends on current market conditions and how long you’ve lived there.

Other factors can also affect your home value. For example, there’s a huge new development just a few blocks away from our house. It has a grocery store, coffee shop, several restaurants, and even an exercise studio in it. This type of accessibility is important to buyers and increases our home’s value because of its proximity to so many amenities. Plus, it’s a significant improvement from having just one takeout place in walking distance when we first purchased our home.

You can ask a licensed Realtor, or a few of them, to give you an estimate of your home’s value and ask them what they’d list it for if you were to sell it today. Once you know this number, you’ll have a better idea of how much equity you have in your home to go towards the purchase of a new one. Equity is your current home’s value minus the mortgage balance that’s left on it.

Once you know how much equity you have in your house, you can use that information to help determine what your budget might be for your next home. If you want to crunch the numbers, Ally Home has a great affordability calculator you can use online to determine what you can afford based on your household income and other factors.

Make sure you add in all your expenses when calculating home affordability. One thing I like about Ally’s affordability calculator is that it allows you to itemize your expenses. They also provide a category labeled “other” when itemizing, which allows you to account for expenses beyond your loans and credit card payments.

Banks usually ask you for gross income (your income before taxes and other deductions) when determining what you can afford. So, it’s important to list all your current expenses in the “other” category, so you get an accurate affordability number. For example, if you invest in a retirement fund, pay for health insurance, send your kids to private school, or help pay expenses for an elderly parent, add those costs together and put that number in the “other” box on the calculator. That way, you get a true estimate of the amount of money you actually have available to go towards a mortgage payment.

Also, don’t forget to consider costs like property taxes, homeowners insurance, property maintenance, utilities, a typical down payment of 20%, and closing costs (these usually range between 2 and 5% of the purchase price). All of these numbers impact home affordability. For example, you might be able to afford a particular home’s monthly payment, but if it’s in a highly sought-after neighborhood with high property taxes, those might put you over budget.

One other thing: don’t forget you’re responsible for paying for a home inspection . Especially in an older home, you could uncover out-of-date electrical, a lack of insulation, or other not immediately visible issues that can be expensive to fix. Once you’re armed with this information, you can factor the cost of future projects into your budget — or even negotiate a lower sale price to accommodate necessary repairs.

It’s a lot to consider, I know. But your home should be a positive financial decision, one you can afford without significant stress or struggle. And, the only way to find out what you can truly afford is to think about the entire picture — the cost of the home itself but also the recurring costs of owning it.

Once you’ve run the numbers, you’re better able to make a choice between staying in your current home or selling it and buying a different one.

After doing our own calculations, we realized we’re better off financially if we stay in our current home for a few more years and do some renovations, like finishing our basement and adding a second bathroom down there. That renovation will add several hundred square feet of space to our home and will give us a little bit more breathing room as our kids grow. A basement renovation, while pricey, was still a better financial decision for us after factoring in all the costs that a different, slightly larger home might bring us.

Another reason we decided not to sell is that we haven’t been in our home long enough to really see a dramatic appreciation in value. Your situation might be different. Maybe you’ve lived in your home for ten years and you have a ton of equity and home appreciation. In that case, it’s possible moving might be a better financial choice for you.

Before making any decisions — or putting the “For Sale” sign in the front yard — you should run the numbers ahead of time and take a few weeks or months to consider what you truly want. After all, buying a home is a serious investment. By following the advice above, you can make a more informed choice on whether or not it’s time to buy your next place.

Catherine Alford is a nationally recognized financial educator who partners with top brands to encourage, educate, and inspire people to take on a more active financial role in their families. She is also the founder of CatherineAlford.com, an award winning personal finance blog that she created in 2010.