Growth can feel exciting and risky, but it doesn’t have to be scary. This applies to any kind of growth, but when you and your financial portfolio are evolving together, the feeling can feel like a lot. Similar thoughts probably cropped up when you invested in your first piece of real estate: am I making a huge mistake? Will I regret this? How do I know if I bought the right home? But, probably, something in you knew beyond these little voices that this opportunity for growth felt right and you’re glad you took that risk, in retrospect.
Now, why are these feelings coming up again? You already tackled this battle before, so why does it feel new? If you’re growing instead of downsizing, you’re looking at a larger home loan and a higher value investment. Something in your life told you that you’re ready for this upgrade, but how can you know for sure? There’s no way to tell for certain, but there is a way to decipher whether or not this is the right move for you. Is this a smart move or is this something you should delay until the moment is more appropriate?
First, you’re going to want to make sure your income today is relative to the income you had when you bought your first home. It’s important to keep your payments relative. For example, if when you bought your first home, your payments represented 35% of your total revenue, you need to make sure that with your new home that percentage stays relatively the same. Keeping this ratio balanced will keep you secure in your new home. It’s normal to be optimistic about a new job that’s likely responsible for your being able to afford a more expensive home, but in the event that you get laid off or we enter another recession, can you still afford that higher payment on your prospective investment? You can if you’re used to dealing within that same expense bracket. Then, because this is a long-term investment, you can evaluate what you think your income will be in the near future. Are you in a job where your salary is growing in tandem with the increasing interest rates or will your income to payment ratio gradually increase despite being able to technically make that higher payment?
Next, to make your new move more recession-proof, you’re going to take the equity you gained in selling your previous home and see how that’s going to impact your payments, including the rate of interest. Be careful because putting all of that equity into your new home immediately vis a vis paying off your new larger loan quicker, all of that equity gained from your sale will disappear should a recession come to pass. Combine that with the potential of getting laid off during that recession, and you’re pretty screwed. Don’t forget the value of cash while you’re investing larger amounts of money. Take some of that money and put it in the bank to build up a nest egg. You want to protect the investments that you make with a security blanket; a backup to your backup.
You can lean more freely into the excitement of taking the next step up by knowing that your risk has been calculated and feels like a smart move. Measuring out how this move will affect your life is part of evaluating that risk. It’s like any other part of life. Risk is necessary for growth as a person. People don’t stay the same for too long. Upgrading your home to meet your needs should feel exciting and full of possibilities instead of wrapped in anxiety.