How to buy a bigger home in an overheated market

A question we have been hearing a lot lately is: “I want to get more space but the market is too hot where I am, and I can’t afford to buy anything bigger. How can I figure out my best options?”

Needing or wanting more room is one of the top reasons why people look to sell their homes. Maybe you are starting a family, growing a family, need at-home office space, or just need more room to breathe.

To complicate matters, many real estate markets in the United States have been climbing for a while and some show no sign of slowing down, making any kind of move that much more expensive.

Here’s a step by step way to look at your options for how to afford more space in an overheated market, and if you do decide to buy, how to be wise about it.

1. Figure out how much your current home is worth

Do you want to learn a completely free way to figure out how much your current home is worth? You can do that by following the steps laid out here, which include pulling recent sales information, available online, for properties very similar to yours for the last six months. Then, triangulate the features and qualities of the homes and come up with a pretty close idea of what your home is worth today.

It’s important to find recent, relevant home sales in order to be accurate. Sales data from more than six months in the past will likely not reflect your market, especially in overheated markets where home values are changing quickly. There is a wealth of information online you can use to figure out what your home is worth and we break it down for you here.

2. Find out how much equity you have in your home

Once you know how much your home is worth, you can figure out how much equity you have in your property.

Equity is determined by taking the value of your home (which you found in step 1) and subtracting out what you owe on your property, such as your remaining mortgage loan balance, and any home equity loans you may have.

Home equity = (Home value) – (Remaining mortgage loan balance + other home loans)

If you want to know more about what your equity is, and get a step-by-step guide to figuring out your equity, we have a resource for you. Or, use our simple, free tool to get an instant equity report. 

3. Calculate how much you’d get back in a sale

Now, let’s take your home equity and subtract out what your closing costs are if you were to sell your property.

If you use a real estate agent to sell your property, you can assume your closing costs would include 3-6% of the sale price, plus another 1-3% in other costs. If you would sell your home without an agent, you can subtract just the 1-3% in other costs.

Take your home equity and subtract out your estimated closing costs.

Great! Now you have the amount that you’d get back if you sold your current home. That is how big your check would be. Now you know how much money you would have to make a downpayment and/or save for future costs.

4. Figure out how much you can afford

If you have a lot of home equity in your current property, that means that you’ll be getting a sizable check if you were to sell your current home. If you have enough equity, you can consider making a larger downpayment in your next property in order to make your mortgage payment lower, even though the home is bigger. For example, you could put 30% down on your new property on a home that was 10% more expensive than your current home, and pay roughly the same in mortgage payments at current interest rates.

Then, you’ll want to do a full work up of your current expenses, income, and overall financial goals. After all, things may have changed since you last bought a home. Are you comfortable with your current mortgage payments? Are they a stretch for you? Do you have new retirement goals? Buying a new home is a chance to rethink what you can afford, and what other obligations and financial goals you want to allow for besides just mortgage payments and building equity.

5. Think creatively

If you don’t have enough home equity to offset the cost of a more expensive property, you still have options.

For example, if space is the most important thing for you, open your aperture of possible locations you can move to. Are there areas that are up and coming that are not as expensive that would still meet your needs?

If you are looking for a house, instead of an apartment, a common strategy is to find a home that can accommodate a rental property either for the long term, or just the short term, until you feel you can financially take it over and absorb it into your home for extra space.

A third option is to consider different mortgage options, such as adjustable rate options, that make your mortgage payment lower. If you do consider adjustable rate mortgages, I urge you to watch this video we made on these types of mortgages, that clearly spells out how they work. Also, consider that if you buy at the top of the market and the market falls, you may end up with less than 20% equity in your home, making it hard to refinance out of an adjustable rate mortgage in the future.

6. Do your research

It’s a genuine worry that you might get caught buying large at the top of the market. Home appreciation is hyperlocal. Some areas see steady climbs in value year after year, while others do not. For example, some areas have still not come back to pre-2007 levels.

If we knew where the top and bottom of the market was, we’d all be real estate millionaires. It’s incredibly hard to tell. But, there is a lot of available data you can use to look at trends. In this article, we lay out how to look at hyperlocal market appreciation so that you can get a good idea.

7. Be savvy when buying in a hot market

One of the biggest hedges against fluctuations in the market is being able to stay in your home a long time. If you find you are buying at a market high, make sure you are buying something that you can stay in for a long time, and get a mortgage that you won’t necessarily have to refinance out of. If the market drops, and you don’t have enough equity in your home to refinance, you don’t want to be sorry.

Do you want to learn more about how to make your home a financial success, no matter where in the market you bought? Read about our new book: Avoid the Money Trap, Turn Your Home into a Financial Powerhouse. It’s available now in both digital and print copies and takes you through everything you need to know about making your home a financial success in the short and long term, without getting taken advantage of.