Americans love to think big—big cars, big houses, big boats. But big headaches are out there, too. Even so, sooner or later, it's quite likely you'll wistfully start thinking about that extra bedroom, a guest bathroom, wall-to-wall walk-in closets, a formal dining room or perhaps a swimming pool.

The passion for trading up most often hits when baby makes three or when couples have a second child. But there are other pulls in the direction of expansion—when an older parent moves in, the need for space and privacy takes on new meaning. And, the wish to spread out becomes an absolute necessity when you start to work from home several days a week or operate a home-based business.

But trading up is not just about gaining space; it's also about gaining net worth and, if you ever trade down, cashing in on your gains. When the latter happens, consult your accountant. Under the quite liberal tax rule, you may be able to downsize without paying the full capital gains tax on your sale. Trading down tends to happen when people retire or when the nest is empty and mom and dad decide to enjoy easy condo living.

Avoid big headaches... If you take too big a step in the trading up process, you could fall off the ladder, especially if you lose your job. That's what happened to Ken Lay, one time CEO of Enron. One day, he found himself without work and was forced to unload, among other assets, four Aspen (Colorado) properties. He took a sizable loss on the last sale—his 4-bedroom, 5 1/2 bath secluded house sold for $5.525 million, about $620,000 less than he and his wife had paid three years before.

Here's how to avoid the Ken Lay mistake and trade up and not out.

Four Protective Steps

Step #1. Figure out your current housing costs

Get out your checkbook register, your credit card statements and any other pertinent documents and tally up what you've spent during the last 12 months on housing.

Step #2. Estimate ongoing increased expenses

Next, estimate your anticipated increased expenses—should you sell your current house for a better one. It's almost a given that the following five expenses will move up as you trade up:

·                           Monthly mortgage payments

·                           Homeowner's insurance

·                           Property taxes

·                           Utilities

·                           Maintenance and upkeep

Finding the numbers...

Mortgage payments. Unless you've been a serious saver, you will need a loan to finance your trade up. For an estimate of how much your monthly mortgage payments will, based on the cost of a new house, click on our mortgage calculator.

Homeowner's insurance. Your insurance agent can tell you what the jump in annual premiums will be. Remember, you don't insure land, so if you are buying more acreage, leave that out of the equation.

Property taxes. To determine property taxes, call the tax collector or assessor in the area you're considering.

Utilities. Although you cannot anticipate precisely how much utilities will rise, you can do a guesstimate based on the increased number of square feet in a new house. If, for example, the new house you're eyeing is 20 percent larger, your heating, air conditioning and electric bills will be approximately 20 percent more.

$Tip: An exception: If your current house is old and not very energy efficient but you move into a newer one, your utility costs may actually drop.

Maintenance. To determine boosts in maintenance, you can use the old rule of thumb: Multiply the purchase price of the home by 1 percent. If you're considering an older house that needs fixing up, increase that figure to 1.25 percent.

Step #3. Estimate one-time costs

On top of these increased ongoing expenses, there are also inevitable one-time outlays, such as: 

·                           Packing and moving

·                           Decorating

·                           New furniture and appliances

·                           Cost of a taking out a new mortgage (points, filing applications, inspections, appraisals, credit reports, fees, etc.)

·                           And let's not forget the real estate broker's commission. If you use a broker to sell your house, you must add to your calculations the commission, typically 5 to 7 percent of the sale price. On a $100,000 sale, that will add up to $5,000 to $7,000. On a $200,000 house, a 6 percent commission will set you back $12,000.

·                           Other costs of selling. Condo and coop sales often entail a move-out fee or a flip tax. With any property, you must meet certain local or state requirements regarding building codes, septic tanks or inspections for pests, radon and other environmental hazards. Repairs made to your old home before you can sell also mount up quickly.

·                           Closing costs. Be sure to have several thousand dollars at hand for unexpected closing costs. You may, for instance, be asked to write out a check for future real estate taxes—a hefty amount in most cases. It's not unusual for home purchases to be put off or even canceled because the buyer was unable to finance the added closing costs.

$Tip: Avoid trouble. Question your broker very carefully about estimated closing costs and seek advice from your accountant.

Step #4. Think it over

Armed with these figures, you must honestly answer the question, can I really afford to spend more on housing? Or, more precisely, how much more of my monthly budget—if any at all—can I earmark for increased housing expenses?

If you are concerned about keeping your job or even if your job is secure but you see no salary raise in the near future, I urge you to delay moving up until the picture brightens. Instead, consider some less pricey moves—putting on an addition, converting your attic into living space, remodeling your kitchen, turning your garage into an office.

On the other hand, if your finances are in good shape, if your income is steadily increasing, if your partner can go back to work, if you are coming into an inheritance, if you won the lottery, trading up now, while interest rates are at historic lows, could be a very smart move.

And, keep in mind that mortgage interest and property taxes are deductible expenses on Schedule A of your 1040, and on most state returns.

Bottom line:

Trading up might also make for a very happy family, which is worth its weight in gold. As Virginia Wolfe pointed out in her essay "A Room with a View," there are two things essential for freedom and personal success—a fixed income and one's own room. We can't argue with that. 

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