Monday, February 18, 2008

Moving up in mortgages?

How do you handle moving up in mortgages? For example where you buy a home, then after a few years (5-7), you sell and move into a larger home with a bigger mortgage. Do you reset your mortgage to a new 15 or 30 year fixed product, or do you just continue with the years left on your current mortgage? Also do you increase the amount borrowed or keep it the same?

I think this question very applicable to people in their 20s. When you are starting out, often you have a lower income, no kids, and little needs. So the house you purchase could be a condo, townhouse, or smaller single family home. Hence after you increase your income and start a family your needs might change.

But should you do this? Or is this expecting too much?

I think that it's a hard to handle saving for retirement, children, and a mortgage in your 20s. Often times, the income isn't matching all your needs. But as you build up your experience and increase your income, you find the ability to comfortably a larger home, children, retirement, etc.

I don't think it's necessarily a bad idea to keep trading in a 30 year mortgage for another 30 year mortgage in your 20s. After all can many people who buy at 22 really afford a single family home? And if you live in an area where you can, was it large enough to fit the family you desire?

Plus if you bought a condo instead, and saved money by buying instead of renting for say 8 years from 22 to 30, perhaps you have significant equity. So is it a bad idea to trade your 22 year mortgage for a new 30 year mortgage to afford the SFH you've been waiting for and saving for by building equity?

This is the new trap of today. Before people like my parents and DH's parents bought one house. They never traded up or moved. But now with jobs in flux, people marrying later or getting divorced, the chances of staying in the same house is small.

So the dynamics of buying one and only one home less the norm, and more the aberration. But does it justify the restarting of a mortgage?

I think it can in some scenarios. Mostly those of people who bought RE in their early 20s. If you wait until your 30s or 40s, I think it makes less sense just because you have less time to finish paying off your mortgage. But in your 20s if you bought something affordable that might not be able to fit your family, then perhaps joining other 30 or 40 somethings in purchasing your final home and restarting your mortgage can make sense.

For us personally, we definitely will have to restart our mortgages. If we had continued on a 30 year fixed, we'd only have 27 years when we bought this current townhouse, and when we buy our next home, 25 years or less. This will be difficult to accomplish, because of prices in our area even if we save up cash for a larger DP and have grown some equity.

But as I write this, I'm also not sure where our incomes will go in the next 10 years so perhaps it's possible. Also we might have the opportunity to move to a lower COLA and that would make our dreams of homeownership a lot more possible. The only thing you can do is make the best decision at the time with regards to your potential income increase, savings, and number of children, etc.

8 comments:

savvy said...

I think it depends on when you stop "moving up" in mortgages. Getting a new 30 year mortgage is one thing when you're 22 but what about when you're 32? Do you really want to be retire age and still paying a mortgage? It may be wiser to get a 15 year mortgage instead of a 30 year mortgage in that case.

Cinzea said...

Here's my scenario: divorced at age 32, I took my settlement money, bought a town house that almost doubled in price in just 2 years (bought at $80K, sold at $135K). Sold and used that equity to buy a home at age 34 ($135k). Raised my 2 kids there and 16 years later, sold ($400k)and used that equity to buy next home without a mortgage ($170k) by age 50 and invested the rest. That's what I called long term planning. I planned on being mortgage free from the start of my scenario.

Living Almost Large said...

Nope, don't want to get divorced Cinzea! No one does. BUT not a bad plan otherwise.

Um, yes I don't mind having a mortgage at 62. Right now it's too far away to determine when I will retire. I am going to guess by 40 and 42 we'll have the cash to pay for a house in full, but won't want to be house rich and cash poor.

I won't pay off my house until the month before we retire. Also who says I'll own in retirement? I am not so sure we'll own something, depends on our health, where we're living, and what is occurring.

Right now it seems like a good plan, but it could change in the future. Plus you never know if you'll downsize like Cinzea did at age 50! There is a lot to be said about selling the house you raise your children in when they leave, which might mean that paying it off is pointless if you end up moving.

Honestly Cinzea I think it's more beneficial to downsize as soon as your can because you save a lot in maintenance, utilities, etc.

Cinzea said...

Well, of course no one marries with the thought of divorcing. My settlement came from the house ex-DH and I owned. The first house I bought was $40k with a waterview. My mortgage payment was only $375 a month. Ah, the good old days.
When I finally moved into the home of 16 years, kids like stability. As soon as the youngest went off to college, bingo, house up for sale. She didn't speak to me for a year. She said I sold HER home.
All is fine now. Kids like the new, downsized home. The mortgage I had on the 16 yr home was for 25 years. I originally thought I'd be 59 with a paid off mortgage. Who'd a thunk I would have moved and cashed out at 50? So, in reality, I'm ahead of my own plan.
It worked out fine and I think it had to do with luck and planning.
You may think that you want a mortgage at 62 but a funny thing happens after you turn 50.....you get a wee bit tired.
Life is a series of choices. I'm satisfied with the way it worked out for me.

Bill said...

I will always get the 30 year mortgage then pay more as I can afford it..always knowing what type of payment I would need to have it paid by retirement.

Living Almost Large said...

I think that the idea of downsizing is fantastic idea. The reason is mostly because you save a lot on maintenance, property taxes, utilities, etc. It becomes hazardous to keep up a larger home as you age.

I think it was very wise to downsize at 50. If given a chance, I think that is something we would consider as well. Just because I'm not sure we'll need all the extra space and simplicity is better.

My parents still have a large house and large utility bills. Would I live in a paid for 4500 sq ft house at 55? Not really, when utility bills are minimally $600-1000/month for one person. This is because of lights, 3 refrigerators, water heater, etc. Everything is old and inefficient. I imagine that it would be maybe $200-300/month if they lived even in a single famiy home that was 2000 sq ft.

So I am not going to say I'm living in the same home in retirement. I think because I'm fiscally conservative my DH and I will downsize because paying outrageous amounts of money for space would not be responsible. Plus the house isn't worth as much because of poor maintenance.

I think it's nice to have paid for home, but even nicer to have something you can afford comfortably, take care of, and live in simply. I may not be able to afford the maintanence, utility bills of a large home in retirement. And I won't say it's possible I could,but come on. That extra $1k/month in utilities???

Cinzea said...

I don't even think that this home I am living in is going to be the last. There is a possibility that in 15 years or so, I may downsize yet once again. Perhaps to a community. I can sell again, cash in the equity and continue living a good quality of life.

Living Almost Large said...

I think more people are moving in assisted living facilities. Especially those which allow a step down program. That means you slowly get more help and are able to die in the home like full nursing facility.