I asked my financial planner for help buying my second home, and he recommended a 3-part strategy that worked
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- My husband and I wanted to upgrade to a larger home but weren't sure how much we could afford, so we asked our financial planner for help.
- He told us to break our budget into two parts - flexible and non-negotiable amounts - and figure out what we'd be able to put down as a down payment.
- Once we ran the numbers, we figured out how much we could comfortably spend. Two months into our new home, our finances are in great shape.
- Ask a financial planner for help buying a home. Use SmartAsset's free tool to connect with a qualified professional near you »
When my husband and I first got the idea that we might be interested in upgrading to a new house, we both knew there was one person we would need to call before we put anything into motion: our financial planner.
Since we've been working with our financial planner for three years now, we've come to count on his guidance and expertise when it comes to making big financial decisions.
Having a financial planner isn't necessarily about having someone tell you what to do with your money, but it helps to get an opinion from a neutral source who just so happens to also be educated on all things finance.
We weren't really sure what to expect on the call, since this would be our first experience selling a house and buying a new one with so many additional budgetary considerations. After all was said and done, though, our financial planner was able to help us home in on some very important considerations when putting together our new-home budget.
1. What items in our budget were non-negotiable?
Since our goal with a new house was to make a few upgrades - like finding a place with a larger backyard, a dedicated guest room, and a home office for me - we knew that we were likely going to be looking at places with higher mortgages than what we were currently paying.
In order to help us determine how much extra home we could afford, our planner combed through our budget with us to determine what items would remain the same each month, and where we had some wiggle room.
For example, some of our non-negotiable monthly budgetary items included:
Car-related items: What we pay for our car each month, plus gas and upkeep, were all expenses that wouldn't change based on moving to a new home.
Kid-related items: We have a number of areas where we spend for our two girls - like preschool payments, 529 contributions, and a miscellaneous category for things like clothes or swim lessons, diapers, etc. - and that number needed to remain relatively the same.
Retirement: Our financial planner made it pretty clear that putting less money into either of our retirement funds in order to pay for a bigger house wasn't a good idea. With future retirement goals in mind, we knew that this monthly budget item would need to remain the same.
Pet care: No matter where we lived, our cat would need the same care - like food and vet visits, etc.
Once we put together a list of items from our budget that wouldn't change, we had a better idea of how much wiggle room we might have for a monthly mortgage payment.
2. Of our negotiable budgetary items, how much were we willing to take away from each?
Our planner helped us realize that just because certain budget items were flexible - like miscellaneous spending categories we have built into our budget for buying home-related items, our general savings, and individual spending - that didn't mean we should take away from them completely to fund a new house.
In other words, just because we could theoretically take $1,000 from what we put into savings every month doesn't mean that we should.
He helped us to see that even if you can afford a home upgrade, it doesn't mean you should. By planning to draw a smaller amount of money from each of our discretionary budget items, we'd be able to keep funding those aspects of our lives, while also hopefully coming up with a decent amount of extra cash for an additional mortgage payment each month.
3. How much of a down payment could we afford?
The down payment is always an important factor to consider when you're buying a home. Experts still recommend putting down 20% as a down payment, even though it's possible to get a mortgage without putting down that amount.
Still, that aside, the fact remains that the more money you can afford to put down on your home, the less your monthly payments will be, and the less you'll pay in interest over the life of your loan in general.
Lucky for us, selling our current home would provide us with an immediate influx of cash, but it wasn't as simple as that. Our planner helped us run some numbers to consider how much we might actually make on the sale of our home, assuming a number of factors including:
Estimated sale price: It's good to include some fluctuations in you calculations here, just in case.
Closing costs: Closing costs are traditionally higher for the people buying the home (which we would be paying on the other end), but when it came to selling our home, things like title, recording, and HOA fees would all take chunks out of our final take-home amount.
Realtor fees: Each state has different laws when it comes to buying and selling a home, but in our case, the seller (us) pays both the selling and buying real estate agent fees.
In our case, this would be 5.6% of the purchase price of our home - a huge number, but worth it in our mind for all the work our realtor put into helping us sell our home quickly and for the most money we could get.
Mortgage balance: We were lucky enough to have been able to put 20% down on our first home when we bought it, and at the time we sold it we had been living in it for a little over three years.
That meant we had a decent amount of equity in the home for ourselves, but we would still owe the mortgage company the majority of what we made on the sale of the home.
With all of that information in mind, we were able to come up with an estimate for what we might have left over for a down payment. Then, with a down payment in mind and an idea of how much wiggle room we had in our budget each month for an additional mortgage payment, we were able to start looking at homes within a price range that we knew we could afford.
At the end of the day, even though I'm a person who enjoys working the numbers to make a financial goal work, in this particular situation, I was more than happy to have a professional by our side, walking us through some of the particulars that we might not have otherwise considered.
We did eventually buy a house and now we're now two months into our new home, and I can say that the shift hasn't been too painful, monetarily, because we were so prepared.
Moving with 2- and 3-year-old kids, on the other hand ... that's a whole different story.
Ask a financial planner for help buying a home. Use SmartAsset's free tool to connect with a qualified professional near you »
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