It could be the time to buy that bigger house

By Ilyce Glink and Samuel J. Tamkin
Friday, February 25, 2011; 10:34 AM

Q. I own a home and owe $388,000 on the mortgage. I think the home is probably worth $370,000. I bought the home for $417,000 in 2006, so I've taken a big hit on equity like everyone else. I have no issue making the payments but feel as though I am trying to dig myself out of a hole. I make an extra payment a year plus pay an additional $200 each month toward the principal on the loan.

Given how low interest rates are right now, do you think it would make sense to sell my house at a loss and trade up now? I live in a starter home and think it makes sense to trade up while prices on bigger houses and mortgage interest rates are really low. I could easily afford to buy a home for $600,000 to $700,000 and put down close to 20 percent. Am I crazy to want to make the move now?

A. I can just imagine all the e-mails I'm going to get from real estate agents wondering whether they can sign you up as a client!

Seriously, I think there are a lot of buyers wondering the same thing: Is now the best time to trade up and buy a bigger house while mortgage interest rates are still low?

If you want to buy a bigger house, now is the time. You'll have to make good on what you owe on your current home, but if you can sell and get out, good for you. Then, you can shop around for the bigger property that you want and buy at today's relatively low prices.

I'd love to see you put down 20 percent, because otherwise you'll get killed on private mortgage insurance. Also, you'd want to make sure you don't get a loan bigger than $417,000 so that you're in the conventional market. (In high-cost areas that limit is temporarily $729,750.)

Keeping the big picture in mind (you're losing a little money on one house but hopefully making it up by buying a home that you can stay in for the long run at an equally reduced price) is a smart way to go.

To put it differently, if real estate prices had increased across the board, you would sell your place at a profit but have to buy your next place at an increased price. It's all relative. If you plan to live in a home for the long term, you might find the right home for yourself now and lock in an interest rate that appeals to your budget as well.

Here's another reason to move now: There may be uncertainty in the market coming down the line with proposals that may do away with Fannie Mae and Freddie Mac. Some proposals may cause interest rates for homebuyers to go up and may make it harder for some homebuyers to get money together to buy their homes.

I think you're on the right path. Hope this helps.

Q. I have some questions regarding the tax exclusion homeowners are entitled to when they sell their primary residence. Let's say a homeowner who has lived in his primary residence for at least two of the past five years is selling his home.

As I understand it, he is allowed to keep up to $250,000 tax free of the profits. But let's say that six months to a year before the home sale, the homeowner marries and files jointly. Although one of the individuals hasn't lived in the home for the full two years, would they still be allowed to take up to $500,000 tax free?

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