Should you buy a second home or a larger one?

Dated: March 10 2022

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People on the move

The coronavirus pandemic continues to fuel the red-hot housing market nationwide.

According to Redfin, 14.5 million Americans will relocate in 2021. The main reasons behind this trend are low mortgage rates, expected to remain around 3% and below, and many employers allowing employees to work remotely.

People living in Seattle, are seeking to relocate to the Eastside and other Washington locations such as Bellingham, Spokane, and Wenatchee. Among my clients, one moved from Bothell to Idaho and another bought a second home in Eastern Washington.

Homes gone bad

Second Homes

Prior to the pandemic, people came home from work to unwind and enjoy time with family and friends. The great room concept made it possible to live side by side and cook, chat in person or online, and watch TV while enjoying each other’s company.

With the advent of Corona, this open space arrangement has lost its luster. Nobody is leaving the home for work or school in the morning. What worked in the evening doesn’t work around the clock. Now we wish there were more walls and spaces to have a home school session, hold an online department meeting, and a Zoom session with the far-away best friend. And all that at the same time.

Larger home or second home?

second homes

Let’s assume for the moment that this is a choice for you. What makes more sense, sell your current home and buy a larger one or buy a second home? Let us also assume that you live in one of the eastern suburbs of Seattle and, because of the schools and other family living nearby, you want to stay in the same area.

Scenario A: sell your current home and buy a larger one

Your agent told you that your current home will easily sell for $850,000. You carry a $400,000 mortgage. A home in the same school district has just come on the market. You know that there would be multiple offers and you figure that you will shell out $1.4 million. You are pre-approved to purchase the home.

Scenario B: do not sell your current home and buy a second one

On the other hand, you always wanted a vacation home. With the advent of the pandemic, it is an appealing alternative to buying a larger home. You already work from home. Why not work from another home? Why not give each other temporarily some needed elbow room? Your one-way drive limit is 90 minutes. Your purchase price maximum is $750,000.

The perspective of a mortgage professional

second homes

To help you decide, I’ve asked for input from Chris Butaud, President of Cleveland Street Mortgage, a 20-year veteran of the mortgage business. Below is his assessment of the two scenarios.

Scenario A

“This option has the appeal of apparent simplicity but that can be misleading. In a hot market such as the one we are in now, you can count on selling your home pretty quickly but finding a new home is a different story. You may need to sell, move and buy when you can, then move again. From a financial standpoint, assuming the facts stipulated above, you would expect to net about $380k which would be applied to the purchase of the new home. Your loan for the new home would be about $580k and resulting in monthly PITI (Principal, Interest Taxes, Insurance) of about $2,950. The biggest cost of this option is the selling costs of your current home (estimated at 8% of the sales price) or about $60,000.”

Scenario B

“If you can afford it, in many ways, this is the simpler option. Assuming you introduce no new cash into the purchase, you could finance 100% of the purchase price with a traditional purchase loan on the new house supplemented with an equity loan on your current home. This eliminates the $60k selling costs and preserves the investment potential of your current home. Of course, the carrying costs will be higher for $1,5mm in houses (two at 750k each) adding $3,900 in PITI to the $2,400 on your primary residence which is about $2,600 more than scenario A.”

The decision

second home

The above scenarios are loosely based on actual interactions with my clients. This particular client decided to go with Scenario B. They gained more square footage than had they opted for Scenario A. More importantly, they were excited about the lifestyle that a vacation home affords. The potential of short-term rental income also played a role.

The larger home they did not buy did sell in two days 9.6 percent over the list price. One reason why my client did not buy that home was that it had a wide-open floor plan where much of the space was shared without privacy.

How may I help you with your situation?

Is your home too small or in the wrong location? Are you planning to move? What are your choices? A larger home or a second home? Let’s talk when it is convenient for you.

Published originally as the 119th issue of The View from the Street.

See Gerhard’s website for sellers and website for buyers.

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Gerhard Ade

Born and educated in Europe, Gerhard Ade’s career spans three decades in marketing communications and two in real estate. A branding expert, his most well-known design is the VIA logo for Canadi....

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