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Lifestyle creep is increasing one’s living standards beyond one’s means, such as applying for a better or bigger home without being able to afford it. A hypothetical example could be someone who earns $120,000 per year with a mortgage rate of 2.75% on a 15-year, $600,000 mortgage, which they rent out while renting their own place. Would trading their house for a nicer $700,000 home with an 8% mortgage be a terrible idea? There are many things to consider. Is the Trade-off for a Bigger Home Worth the Higher Interest Rates?
1. It Might Be a Little Tight
Depending on your income, would it be worth it to trade a low monthly mortgage payment, covered by your renters, for a new $4,000 to $5,000 one? Considering such new overhead, the new house would have to be considerably upgraded. You must analyze your future income stability — are you financially independent? What savings or assets do you have?
2. The Grass Isn’t Always Greener
While that expensive house with the For Sale sign you pass on your daily commute through suburbia calls out to you, do you really want an additional 5.25% of interest payments looming? Say you have $400,000 in payments left over 15 years. This amounts to an extra $21,000 on top of the current expenditure — or another $1,400 monthly. Yikes.
3. State and Local Tax Deductions
Better known as SALT deductions, this applies to anybody who itemizes their tax returns and qualifies for other local and state-level tax deductions from their adjusted gross income, such as local property taxes. The provision is now capped at $10,000 — $5,000 per married party, but if you live in a state with high taxation rates, you may save a few thousand per year.
4. Income vs. Expense
Anyone looking to increase their expenditures so drastically needs to have an audit of their expenses vs. income. Will they be able to cover the extra interest payments on top of an already more expensive monthly payment? Unless they are a professional athlete who just signed a new seven-year contract or a hedge fund manager who just received their bonus, maybe it makes sense to examine the next 20 years.
5. Save the Cash for Upgrading
While a sparkly new house in a better part of town might be tempting, the extra payments you inherit will surely end your rent, which is passive income on your investment. Why not just spend that down payment on upgrading your entire unit? Maybe you can’t build more space onto the property, but you could maximize what you have.
6. Ride the Storm
With interest rates still high and inflation only starting to recede, maybe a better idea would be to wait it out. Is it worth being stuck with an almost double monthly payment just for a few extra square yards of space and a nice interior finish? 8% interest is such a jump from 2.75% that any financial adviser not making a commission would shake you by your lapels.
7. Embrace Your Inner Boomer
Why would you risk losing your fantasy 2.75% mortgage interest rate? If your income and future salary are stable, make the most of them. Saving the cash for a down payment instead of getting a new mortgage takes a page from the boomer playbook. If you have the realistic chance to save for a second property, sacrifice, hard work, and frugal living are what worked for your parents and grandparents.
8. Make a What-if Budget
For most people making a big decision, it is always worth writing a 10-year budget based on the hypothetical scenario you face. What other long-term financial goals do you have? Will these continue with the new, expensive acquisition? Do you plan to have children one day, and have you budgeted for their college fund? Will this mean that vacations can continue?
9. It All Adds Up
The prices being thrown around are just the tip of the proverbial iceberg — once the mortgage is signed and you’re tied into losing a third of your annual income, there are other monthly fees to consider. With excessive energy bills, housing association fees, insurance premiums, and property taxes to consider, the paycheck will dwindle faster than you think.
10. Aim Lower
If you’re already renting a good-sized property out, maybe it would be best to outsource the management of that property and then find a lower-priced second home to live in. Then, once the first property’s mortgage is paid off, combine both property values to chase the huge dream home you want. However, knowing your limits in the property game is essential if you hope to avoid bankruptcy.
Source: Reddit
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