Can We Really Afford To ‘Move Up’?
Posted on October 26, 2007 by Melissa
Filed Under Housing, Mortgage, Savings
Earlier this year my husband and I encountered this very question. We had always talked about moving into a new home after we married, one that was “ours”. But could we really afford to take on a higher mortgage payment? After all, we had been living way outside our means and had only just figured out how to make ends meet in our current home.
Sure, on paper we could afford a higher mortgage payment if we subjected our budget to the ol’ slash-and-burn treatment. But could we actually tolerate a tighter budget to reach our dreams of a new home? We didn’t want to assume we could handle it or that “we’ll just make it work”. We needed to know we could handle it before we committed to higher housing costs.
Here are the two ways we gave a new mortgage a “test-run”.
Take it for a spin
Seeing a mortgage payment on paper and actually living with that payment are two different things. In order to be sure you can handle the higher payment it’s important that you try living with it before you commit to it.
First, figure out the difference in cost between your current housing payment and the “new” mortgage payment. Make sure when estimating this new payment that you err on the side of caution and go high.
Example:
| New Mortgage Payment (w/ taxes, insurance, etc) | $1400 |
| Current Housing Payment | $800 |
| Difference | $600 |
Set up an automatic transfer to deposit the difference ($600) each month into a high-interest savings account like ING Direct. No dipping into it, it is essentially spent, just like the new mortgage would be. By saving this amount in addition to paying your current housing payment you are now mimicking the effect the new mortgage payment would have on your budget.
This experiment helps you in two ways:
- You experience and learn to adjust to a higher mortgage in “real life” (instead of just on paper)
- You build up savings dedicated for moving/new home ownership costs
In the example above, you would have saved up $3600 (plus the interest) if you stuck to it for 6 months. If you can handle testing out the “new” mortgage for 4-6 months, without running up bills or needing that extra income, you can feel pretty confident about taking on a higher payment. If not, rethink if you can really afford it.
Work that budget
Not only will you need to adjust your budget to allow for the higher mortgage but you will also have to prepare for the other potential costs related to moving into a new home. What household bills can you expect to change? For example, how will your utilities be affected? You will need to look at all your expenses and estimate how the move might increase or decrease certain areas and reallocate your income accordingly. When we went through our budget we identified many areas that would need to be increased after the move.
To find the additional money needed your budget will need to be scrutinized. Where can you trim the fat? The money needed for the new mortgage and related expenses must come from somewhere, and we aren’t talking about relying on your credit cards. Evaluate what is essential or most important to you and work aggressively to cut spending in all other areas. Rework your budget, funneling the money you cut from those areas into the categories that need more cushion.
Remember - you still need to be figuring in debt payments and savings goals into these budgets. You should avoid falling behind on those goals in order to reach this one. If you can’t find the money in your budget without scaling back on your savings or debt payments then really think if it is in your best interest to make this move.
We now feel confident that we have the ability and the discipline to handle the costs of “moving up”. We are no longer simply guessing that we can afford it or going by the assumption that we will be able to “just make it work”. We know we can because we have been living it.
Since we have already been budgeting for our new mortgage, the “lifestyle adjustment” many people experience when they have less disposable income should be minimal for us. At first, not having that money in the budget was difficult but we have worked through the aches and pains and are comfortable now. I’m just glad we dealt with that struggle beforehand instead of after the commitment of the new mortgage.
The best part of all of this is that we have been able to save up a tidy sum in our ING account to purchase items like solar screens and a sprinkler system without having to go into additional debt after the move.
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Melissa,
I love the idea of taking a higher mortgage payment out for a test-drive before making a long-term commitment. I would think that ideally you’d run this experiment during a more challenging financial time period — like over Christmas? That would give a truly realistic picture of what a mortgage payment would feel like. And I love the fact that you’d have a nice little cushion saved up after 6-months of your trial run. Considering the age of my children and my husband, I think the next time we move we’ll be moving down, not up. Thanks for sharing this idea!
This is an excellent idea for those looking to move. I wish we’d done this two years ago when we purchased a new home and “moved up.” I think the unexpected expenses caught up with us and that is part of the reason we have so much credit card debt now. Next time we move, we’ll have to think it through more thoroughly. Thanks for the great tip!
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This is such a simple idea and yet it would just never have occurred to me!! (Goes to show why you’re here giving money advice and I’m not!) Have I mentioned how much I love your blog?!
We moved up this year, and have found that not only are things like insurance & mortgage payment higher, but more space means more white walls that “need” to be painted, more space that “needs” to be filled with furniture, and a basement that “needs” to be finished. We are taking it a little at a time, even though our new (3 years old) house needs no repairs, has little maintenance costs, and is much more efficient to heat & cool than the old one, it does cost us more than just the difference in the house payment. I’m grateful we were well prepared to move up, because if we had been counting on just the difference in “up front” costs, we would have actually gone in the hole.
@Elizabeth - Yeah, trying this experiment during a tougher time would be ideal. In our case, we will be moving during the holidays so we didn’t get a chance to test it during that time. Luckily, we estimated the new bills pretty high so that we would have an added cushion in our practice budget. That way we are already used to living on even less than what our new mortgage and projected bills require.
@Cynthia – Welcome and thanks for commenting! “Moving up” can involve costs that even the best prepared people might not anticipate. I think going into debt after a move is really common, especially as you adjust to the “unknown”.
@ValleyGirl – Thank you for the wonderful compliment! I’m really happy you enjoy the site. As for the advice, I’m glad it’s helpful - doing these things has certainly helped us.
@Jennifer – I’m glad you pointed that out! Yes, moving up usually means more space to decorate and fill. We are planning on doing the same thing and furnishing rooms little by little. The important things come first like a fridge and the other stuff can wait. We aren’t in a hurry. :-)
What a great idea!
I recently moved home, and am having to stretch myself quite a bit - I used moveme.com to help me get a good mortgage rate, but it would have been great to take it for a test run first!
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I think that your lifestyle adjustment appraoch is superb. It’s a great way to actually live it before you take the plunge. I wish more people would do this.
This is a great idea and a very disciplined one. Paying your mortgage is a serious matter and your idea is definnately worth the peace of mind.