The following is a post by MPFJ staff writer, Kevin Mercadante, who is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry.
The American Way to buy a house seems to be to buy as much house as your income and financial circumstances will allow. We are nothing if not a nation of optimists! The assumption is always that income will rise in the future, enabling us to more easily afford that which we can barely cover right now.
I’m going to suggest something that may be downright anti-American – that you resist the predominant trend, and buy less house than you can afford. Here are five reasons why you should consider doing exactly that.
1. To Allow Breathing Room So You Can Enjoy Life
The idea of buying a house at the upper limits of your ability to afford one, then making up for it by furnishing it with wooden boxes and eating canned beans for food every night to make up for the difference, is a romantic hoax. It’s the equivalent of living like a homeless person so that you can afford a house.
Rest assured, that once you buy a house, you will still have most of the same preferences that you did before you were a happy homeowner. You must leave room in your budget to accommodate those preferences!
Most people overestimate their ability to go on a financial diet, particularly after buying a house. And even somewhat ironically, buying a house usually triggers a series of major non-housing purchases. This could include new furniture, window treatments, minor (and not so minor) improvements to the property, landscaping, and often a new car to go in the driveway of the new house. None of that is conducive to successful budget.
The point is, don’t overestimate your ability to live on less money once you buy a house. You’ll still want an occasional dinner out, a shopping spree, and a night out on the town. You need to be prepared for all of that.
2. To Take a Step Back – If That’s What You Need to Go Forward
If you’re looking to change jobs, or to make a career change, that often involves taking a reduction in salary. If your budget is already tightly stretched by an outsized house payment, you probably won’t be able to give up the extra income to pursue what could ultimately be a better opportunity.
And that’s an important point. There’s a saying – sometimes you have to take a step back to go forward – that applies to a lot of career situations. In order to take a position that will ultimately prepare you for a major advance, you sometimes have to first accept a lower paying job. It is there that you will gain the experience necessary, or even transition over to a more successful organization.
The situation will be magnified the event that you want to start your own business. A high house payment will be a major obstacle to starting a business. Becoming an entrepreneur often means starting out with little or no income. But that’s a step you may never be able to take because of your high house payment.
Make sure any house you buy affords you some level of economic flexibility, just in case you decide to make a major career change. Your house should be an asset, not an obstacle to your progress.
3. To Leave Yourself More Money For Savings and Investments
While most people think of owning a home as being an investment, we also know that it’s important to have non-housing type investments. This includes not just tax-sheltered retirement plans, but also investments in mutual funds, certificates of deposit, and stocks that are held outside of a retirement plan. In addition, life is always better, easier, and more secure if you have a well-stocked emergency fund.
But if too much of your income is being eaten up by your house payment – and by other expenses related to your home – you’ll have little if any money available for any of these investments.
Savings and investments should be a line-item in your household budget, even and especially when you’re planning to buy a house. Owning a home and paying down the mortgage is one type of investment, but you also must have financial investments in order to achieve any level of financial independence. Buying too much house will close the door on the independence.
4. To Enable You to Better Withstand Financial Crisis
When you buy a home at the maximum level of your affordability, you’ll be effectively removing any flexibility in the event that you will face a financial crisis.
What might that financial crisis involve? It could be the loss of a job, a medical catastrophe, or the sudden need to take care of an extended family member. In all of our plans, including the purchase of a home, we need to leave room in the budget to cover such a contingency.
5. To Give Yourself More Room to Payoff Your Mortgage Early
Now that real estate appreciation is no longer a given, the pay down and payoff of your mortgage becomes a critical component of the success of your housing investment. But if your budget is too tightly stretched by your basic house payment, it will be very difficult to come up with extra money to accelerate the payoff of your loan.
By buying less house than you can afford, your basic house payment will be well below your income, and that will allow you extra funds to pay the mortgage off more quickly.
In today’s housing market, that can be more critical than ever. By paying your mortgage down ahead of schedule, you’re creating more equity in your home. That will make it much easier for you to sell the property in the event that you need to take a job in another city, or to move for some other reason.
If you’re facing the decision to buy a home, take the unconventional approach, and buy less house than you can afford. Though it may be a blow to your ego, it will be a boon to your financial situation. Having more money will give you far more options than owning the nicest house you can possibly afford.
How about you all? When you purchased a home, what % of your pre-tax income did the mortgage payment represent? Did it allow you to meet your various other savings/investing/retirement goals?
Share your experiences by commenting below!
***Photo courtesy of http://www.flickr.com/photos/usdagov/6383550119/in/
