Traditionally, consumers spend an extraordinary amount of time looking for their first home and their last home. A starter home is important because it is the first time going through such a significant experience. First-time buyers need to be cautious of making mistakes due to inexperience and may overlook critical aspects of a home. In many cases, a starter home means a “fixer-upper” and buyers need to be cautious about taking on more than they can handle. First-time buyers also should be aware of the importance mortgage terms and rates will have on their loan.
While buyers will have more experience when purchasing a retirement home, there’s a certain finality to the purchase. Will it be big enough or too big? Should it be close to family or at a location you’ve always wanted to call home. Many older buyers want a home with less maintenance and perhaps fewer stairs.
Some may overlook the importance, however, of that second home purchase. A second home is often the core house that will serve as the family’s home for a significant amount of time. In some cases, a second home may serve more as a “dream home” for buyers. It may be the home from which any children spend their formative years and build childhood memories.
Here, we will take a look at the signs you may be ready for your second home and what you should look for. We’ll detail steps that should be taken when moving up and how to increase your odds of a successful move.
You’ve bought your starter home. Are you ready for the next step?
Signals It’s Time to Move Up
There may be some clear signals you are ready to move on from your starter home. Here are some signs it is time to move up to your second home.
- Your family’s needs have changed. This is one of the most significant signs you may be ready to move up to a second home. Family changes can mean a marriage or merging of families. It could mean the addition of a child. Perhaps your work location has changed, or you are now working remotely from home. Families may explore second homes as children reach school age.
- You have completed most of your desired upgrades. When you take a walk through your home, do you take a certain amount of satisfaction in the improvements you made? Have you completed most of the projects you wanted to take on when you purchased your starter home? Have you gotten to the point where your previous improvements need improvement? It is likely time to move up.
- You know large, costly repairs may be ahead. Many of the improvements you make to a home can have a solid return on investment. Others will not. For example, it could be difficult to recoup the money spent on a roof replacement, electrical or plumbing work. This can be a good time to let someone else take on these expenses.
- You have significant equity in your home. Homeowners can build equity in their homes in several ways. They may have had a large down payment; property values may have increased in a neighborhood or improvements may have added significant value to a property. Selling when values have peaked and equity is high can make moving to a better, nicer, and/or bigger home much easier and affordable.
- There are signs your current neighborhood is deteriorating. Some families, especially young families, will move on from their starter home once they begin to notice signs of deterioration in their current neighborhood. Perhaps the neighborhood park isn’t being taken care of as it once was, or the neighbors aren’t paying enough attention to their homes. Maybe a neighborhood has changed due to construction or a road widening. These can all serve as an impetus to move on.
- You’ve changed jobs or received a promotion. If you have changed jobs or gotten a significant increase in pay, it may be time to consider moving on up. Don’t be too quick to make a move, however. Once you are comfortable and confident in the position, it may be time to start looking around for your second home. It is best to be conservative when calculating your budget for that second home however, so you will not become “house poor.”
- You simply need a change. Not every decision surrounding the purchase of a second home has to be 100% practical. Maybe you have just tired of the home or neighborhood you live in. Perhaps you have become restless and need “something” to maintain your progress and momentum. Maybe you haven’t even looked at real estate options for years and have become detached to housing value and loan rates.
What to Look for in an Upgraded Home
The specifics of what to look for in a second home will depend on your particular situation. If your family is growing, you’ll want to take a close look at schools, area playgrounds and consider a larger yard. If a move is due to a change in employment, a location close to work or public transportation may become more important. If you’ll be working remotely, the house will need sufficient space and speedy and reliable internet access.
Try to imagine what you and your family’s needs will be in five and ten years. If this is a home you may spend the next 15 to 20 years in, you will want it to be large enough and have creature comforts.
In many ways, purchasing a second home is like purchasing any home. There are some key components to consider.
- Avoid falling in love with a property too quickly.
- Become very familiar with the neighborhood and potential nearby developments.
- Buy at or slightly below your means.
- Shop around for a mortgage that suits your budget and needs.
Steps to Moving Up
You can increase your odds of a successful transition from a starter home to a second home by taking the following steps.
- Carefully evaluate your current financial situation. How large of a downpayment can you afford? What monthly payments will fit into your budget?
- Get pre-approved or pre-qualified for a mortgage. Pre-qualifying for a mortgage can add to your confidence and serve as a negotiating tool when purchasing a home. Pre-qualified offers carry more weight than those that have contingencies and some sellers will accept a lower bid on a home if it comes from a pre-qualified buyer.
- Create a monthly budget. Remember, your second home will include more expenses than just the mortgage. You’ll need to determine estimated homeowners’ insurance costs, property taxes, and immediate and long-term upgrades and repairs.
- Know what you are looking for. Be specific. What are the “must-haves” for your next home and what are “deal breakers.” How many bedrooms are required? Do you want an entertainment room or workspace? Should it have a master suite? Spa? Pool? Knowing what you want will help make sure you end up with a home that meets those needs.
Mistakes to Avoid When Transitioning to a Second Home
Those who are considering moving on from their starter home to a second home can frequently make similar mistakes. Here are some pitfalls that should be avoided when buying a second home.
- Overestimating the value of their current home. The equity you have built in your current home will likely play a big part in how much home you can afford moving forward. If you overestimate the value of your present property, that can impact you negatively moving forward.
- Moving too soon. Making a move from your starter home to a second home too quickly after a raise or promotion could be premature. Consider establishing yourself in your new position (if possible) before making a move.
- Moving too slowly. Waiting too long to move forward can also cause problems, especially if your family is growing. This can put undue pressure on a buyer and perhaps even create errors. Think and plan accordingly.
- Not getting pre-qualified. Not getting pre-qualified for a mortgage can create a whole host of problems when buying a second home. On the other hand, getting pre-qualified offers multiple advantages that shouldn’t be ignored.
- Over-extending budgets. When moving onto a second home from a starter home, it can be tempting to take too large of a leap. This is particularly true if income isn’t increasing through the purchase. Always remember you will require shorter-term transition funds for moving and immediate improvements. Along with a larger mortgage, property taxes and home insurance will likely increase.
- Not shopping for mortgage loans. Many buyers don’t recognize the impact interest rates can have on the overall cost of a home. Assuming all mortgage loans are the same can be a very big mistake. Compare rates and shop around for your mortgage as you would for a home.
- Not properly accounting for the sale of an existing home. One of the biggest differences between buying a starter home and a second home is that a first home purchase likely didn’t involve the sale of a current property. A seller will want to use the equity of their first home to facilitate the purchase of a second property. This can complicate the process. Working with a professional real estate agent can be helpful through this more complex procedure.
- Not performing due diligence. Moving from a starter home to a larger second home can be an exciting time, but it still takes due diligence. This may mean having a property thoroughly inspected and looking into any potential zoning changes or development plans in an area. States have differing disclosure rules regarding residential real estate so it is always better to ask and
Know the Housing and Mortgage Market
When upgrading from a starter home to a second home, knowing where both the housing market and mortgage rates stand can be invaluable. When the demand for housing exceeds the amount of inventory available in the market it is said to be “seller’s market.” This generally means housing prices will be higher and homes for sale may receive multiple bids. In this type of market, homes frequently sell for more than the listing price. In a “buyer’s market,” there are more homes for sale than active buyers. This provides more options for buyers and a more competitive situation for sellers. This can drive prices downward, allowing buyers to get more house for their dollar.
One should not overlook the important role mortgage rates play in how much house a buyer can afford. Even a seemingly small one half of one-percent movement in mortgage rates can make tens of thousands of dollars difference in what consumers pay over the life of a mortgage. This is why pursuing stepping up from your starter home when mortgage rates are low can be such a wise financial decision.
No matter the economy, people are always buying or selling real estate. It is just how much house they can get and how much they pay for it that changes. Perform your due diligence and choose wisely. Your decision on stepping up to your second home can make a huge positive financial impact on your financial future.