My husband and I are in a quandary, and we need your help:
Thanks to some new employment opportunities, we’ve been approved for a $310,000 mortgage on a new house. Woo hoo! We’re in an area with a relatively low cost of living, so that money could nab us a 3,500 square foot house with all the high-end finishes on an acre lot in a great neighborhood, close to all the best schools. Sounds like a no brainer, right?
Maybe if we want to be house rich and cash poor.
We’ve Been Here Before
This isn’t the first time my husband and I have been in this situation. Six years ago, when we were buying our first home, the bank approved us for a loan of up to $400,000. Of course, those were the days of lenders and borrowers spending fast and loose, without much regard for what you actually could afford. Ultimately, we asked our lender to only put a modest $150,000 on our mortgage preapproval letter, committing ourselves to viewing homes that fell well below what our bank thought was in our budget.
It worked out for us. Over the past five and a half years, we’ve never been underwater or behind on our mortgage payments. Although housing values in our neighborhood – like just about everywhere else – have fallen, we’ll still stand to walk away from the sale of this house $10,000-$20,000 richer, depending on the closing price. Much of the equity we’ve built is thanks to an addition, which we paid for in cash, as well as extra payments we made on our loan’s principle.
Still, our starter home is small. It was big enough when it was just me and my husband, but over the intervening years, we’ve added a dog, two kids, an at-home business, and tons of stuff (ie, crap). We’ve outgrown our current accommodations. When we purchased this house, we didn’t give a lot of consideration to our future needs. Now, we need a home that will fit us and our lifestyle not just for the next five years, but hopefully for the next 30, 40, and beyond.
The Case For A Bigger Mortgage
With a home loan in the $300,000 neighborhood, we’d likely be shelling out close to $2,000 in mortgage and escrow a month – that’s more than double our current monthly payments. However, because lenders have put in stricter regulations following the mortgage meltdown, our mortgage would take up no more than a third of our gross monthly income. Before a job change left us with more discretionary income, our front end debt-to-income ratio – which comparatively measures your monthly mortgage costs against your pre-tax monthly income – was in the area of 35 percent. In other words, we’ve been “cash poor” before – at least in the bank’s eyes. Would becoming house rich by moving up to a larger home – and a larger mortgage – make us feel the pinch this time around?
Should We Stay Cash Rich?
Because my husband and I opted for the smaller home – and mortgage – the first time around, we’ve had the benefits of being “cash rich” for the last five years. Even when I quit my full-time job to embark on a freelance writing career and money was very tight, we still managed to not only pay our bills, but funnel money into our investments while still indulging in some of life’s little luxuries like trips and dinners out.
If we opted for the bigger mortgage, we might have to sacrifice some of that. Although we’d be able to easily handle the added expenses on a month to month basis, the bigger mortgage would mean we’d have to increase the size of our emergency fund. Also, major repairs to the house – like a new roof, or HVAC repairs – cost more as the size of the house increases, meaning what may be a minor emergency in a our current home could be a major expense in a larger one.
And then, there’s the pressure of keeping up with the Joneses. In our decidedly middle class neighborhood, we’re right on par with our neighbors: we drive the same cars, send our children to the same schools, take vacations to the same places. If we upgraded to a bigger home in a nicer neighborhood, would we feel the pressure to upgrade the rest of our lives as well? I’d like to think we could remain humble, but I have my doubts.
House Rich & Cash Poor
I remember growing up going to a friend’s house. Although she and her family had lived in the home for several years, it was sparsely furnished with couches and tables that looked like they’d been more than gently used. At the time, I just figured they didn’t care, and maybe that was true; but now, as an adult, I see they were most likely house rich and cash poor, overextending their finances in order to buy a house that was bigger than what they could truly afford.
So my question is this:
Should my husband and I upgrade to a larger home, even if it means reducing our discretionary funds? If you were us, what size loan would you take out? Is there a happy medium here?