Expert: Matt Heisler - 2/8/2012

Question
Hello-
I just had a question about the costs of upgrading to a new house when you outgrow your current one.  We have been in our house just about a year, but feel it may be too small soon (more kids coming) and we may need to get a bigger one is a few years.  We bought it for $200,000 and put $40,000 down.  I am just wondering about estimated cost if we were to get a new house after such a short time.  Say we found another house for about the same price or slightly higher.  Would the estimated realtor fees of, say $10,000 (5% of the purchase price) and the estimated $4000 closing costs on the new house have to be paid out of pocket, or would they be part of the new loan that we get?  Does having more equity in the house make  the costs of getting a new home lower?  We don’t have a lot of money so just trying to figure out how expensive it will be.  Thanks for your help!

Answer
In general, Realtor fees are out of the net of your house profit.  You can roll over closing costs and put them in the new loan, but you're still paying them.  Add in some moving fees and additional transaction costs, and it's 20K.

My advice is to squeeze in until you've been in place about 5 years. Seven is better. The reason you need to stay five years, is in a typical mortgage you'll have built equity of about 20K, more, if you pay extra principle every month (which I recommend).  Alternatively, you could try to do an addition for about 20-30K, which should result in building equity, and lower your net transaction costs in the future.  

It's not all bad news.  Staying put will likely allow your home to appreciate in value, and just a 2% increase annually results in another 25 K in equity.  So in five years you'll owe less than 180K, and your home will be worth 265K, a difference of 85K, bringing your total net equity to 125K.  That starts to sound like money you can move up with.

Buying a house is an expensive process, I think you'll find that you can't just get a bigger house without spending a lot more money, both for the house and the transaction costs.