Dreaming of a bigger home

Wyonnie and Kwame Flaherty, with daughter Nylah.

(Money Magazine) -- When Wyonnie and Kwame Flaherty bought their two-bedroom apartment in Queens, N.Y., in 2008, they thought it was the perfect stepping-stone.

Putting down 20% of the $177,000 purchase price, the couple figured that rising home values would eventually help them trade up to a house.

Three years later, the 1,000-square-foot apartment feels too cozy for the 35-year-old couple and their 4-year-old daughter, Nylah, especially since they are considering having a second child.

"There are families who squeeze into a small apartment, but we'd rather not," says Wyonnie.

They pay $740 a month on their mortgage, plus another $945 in monthly maintenance, which includes taxes and heat. "It seems like for a couple hundred dollars more a month we could buy a single-family home in a good school district," she says.

Trouble is, with local real estate still in the doldrums, their home is worth $17,000 less than they paid. After accounting for commissions and other costs, they'd walk away with just over $14,000 to put toward a $350,000 house -- where three-bedroom homes in a top school district in Queens start.

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And while they make a good living -- both work in nonprofit management -- ongoing expenses eat up much of their combined $130,000 salaries.

Child care is a huge hit at $900 a month; monthly payments on $30,000 in student loans grab another $400. Plus, the couple have rolled over a $6,000 credit card balance to 0% cards, but at some point they'll need to retire that debt.

Kwame and Wyonnie shouldn't hire movers right away. "Stay in your current apartment as long as you can," says Scarsdale, N.Y., financial planner Ben Sullivan.

Aim for 10% down. A Federal Housing Administration mortgage would let the Flahertys buy a home with as little as 3.5% down, but there's a catch: a 1% one-time fee and annual mortgage insurance premiums equal to 1.15% of the loan value.

Given that the couple have good credit, they're likely to pay less over the long run with a conventional loan, even if rates increase slightly, says New York City mortgage banker Robert Flower. Adds Sullivan: "I would like to see them put down at least 10%."

Be realistic about costs. The Flahertys may be underestimating the cost of owning. Just because they won't have a monthly maintenance bill, those expenses won't go away, says New York financial planner Ray Mignone. "A house comes with a lot of gremlins in the closets." Budget $5,000 a year for upkeep alone.

Save hard. Priority No. 1 is to boost their cash reserves to at least $18,000. By making nips and tucks in their budget -- fewer meals out, less impulse shopping -- they should be able to up their monthly savings from $400 to $600.

Devoting what Kwame earns from the freelance writing he has started doing for a sports website will help them reach that goal by fall 2012.

Saving can be a higher priority than paying off their $6,000 credit card balance, as long as they can continue to find 0% or low-rate card offers. By next year they can shift their energy toward building a down payment. They should be ready to house hunt in less than three years, though a second child might push back that timetable.

Don't neglect retirement. With $70,000 saved, the Flahertys are off to a good start. Kwame sets aside 6% of his pay, which his company matches dollar-for-dollar up to 3%. As long as they keep that up, they can put off doing more for now.

Be patient. "I don't think rates are going to jump dramatically, and I certainly don't think house prices are going to jump quickly," says Queens real estate agent Walt Siefert, who suggests the couple explore neighborhoods in northern Queens, paying close attention to the quality of individual schools rather than ruling out entire districts.

It's a plan they can live with: "At least now," says Kwame, "we know there's hope."