Thinking back to the housing crisis in our not too distant past, buying more house than you can afford could be the biggest mistake you make. It used to be that people bought houses to ‘grow into.’ They figured it would save them money down the road because they wouldn’t have to move. They also assumed their income and savings would grow with them. When that didn’t happen, many people were left without a home to call their own.
While buying less house than you know you can afford is a personal decision, we provide the top reasons we think it’s right.
Houses Don’t Always Appreciate
Again, as the housing crash showed us, homes can depreciate and do it fast. On average, homeowners lost 30% of their home value. In some areas though, that amount was exacerbated. Some homeowners lost as much as 60% of their home’s value.
If you are already in a home that you struggle to afford, losing that much value can put you in a real bind. This is especially true if this is just a temporary placement for you. Let’s say you bought a house with the intention of living there for 10 years. If during the 8th year the area’s prices take a nosedive, you might find yourself losing money rather than making it when it’s time to sell.
It may not be as big of a deal if this is your ‘forever home.’ In that case, you may be able to wait out the lower prices with the hopes that they appreciate again.
Bigger Houses Cost More Every Day
Even if you can afford the purchase price of a bigger house, you have to consider the cost of its upkeep. Utilities, furnishings, and maintenance are just a few areas of concern. You also need to figure real estate taxes and homeowner’s insurance. Both of which will be higher with more space.
Even if a house is in perfect condition when you buy it, things stop working over time. Floors, windows, and roofs experience wear and tear and need replacing. The more square footage a home has, the more expensive it will be to replace these things. If you spend all of your money on buying the home, it may leave very little for repairs and upgrades in the future.
You Need an Emergency Fund for Things you Can’t Afford
Speaking of things breaking, an emergency fund is a crucial step in financial security. This is not only for your home, but for other areas of your life too. What happens if your car suddenly dies or you get in a serious car accident and need money for medical bills? If you spent all of your money on your home, it could leave you financially strapped.
If you have kids, you’ll need even more money. You’ll need to save for their future education as well as their everyday expenses. You may not have kids now, but if you plan to in the future, these are things you need to consider. Your food, medical, clothing, and everyday living costs will increase. If you strap yourself with a large mortgage, these things could be difficult to afford.
You Don’t Need a Mortgage Forever
Wouldn’t it be nice to be mortgage free eventually? Just because there are 30-year mortgages available doesn’t mean you need to take 30 years to pay it off. If you buy less than you can afford, you may be able to take a smaller term. What if you could afford the 15-year payment on a smaller home rather than a 30-year payment on a large home? This means you’d own your home free and clear in just 15 years.
The more years you cut off your mortgage, the less interest you pay. This could amount to thousands of dollars in savings over your lifetime. I’m sure you can think of a lot of other things to do with that money rather than hand it over to a bank in the form of interest charges.
Decide What’s Right for You
No one can tell you which home is right for you. If you want to be like the general population, consider your total debt ratio. Conventional loans allow ratios up to 36%; this includes all debts. You can aim for a debt ratio of 36% or even lower. It depends on your goals and what you want to commit to for the next 15 to 30 years. You have to decide what you can live with now and in the future, when things are unpredictable.
Buying less home than you can afford is perfectly acceptable. Many people think bigger is better, but for who? You don’t buy a home to impress others; you buy it for the comfort and safety of your family. You need to decide what you are comfortable living in as well as paying for over the next 30 years or so.