When it comes to real estate, the more you spend, the more money everyone makes. At every level of your home purchase.
Once you find the perfect location, the costs add up. According to the National Association of Realtors, real estate agents are paid a percentage of the purchase price of your home. In other words, the more you spend, the bigger the payday. And the bigger the loan, the higher the closing costs and loan fees tend to be – a benefit that goes straight out of your lender’s pocket.
In case you’re wondering, this is the reason why your real estate professional might pay little attention when you tell them you only want to spend X dollars on a new home. It’s not that they aren’t professional or don’t care about your financial situation; it’s just that they only benefit if your budget sneaks a few bucks here or there.
And what is a few thousand dollars between friends?
How much money to spend on a house
I know – I was there. When my husband and I moved to a new city last year, our income enabled us to spend 300% more than we planned. And while we shared our intentions with our agent, it didn’t stop her from suggesting properties outside of our comfort zone. In fact, I remember having had a lot of conversations about it and receiving advice like this:
“You know, for every $ 1,000 you spend, your payment will only increase by $ 16.”
“Your children are getting older – you need a house that you can grow into.”
“The interest rates are so low. You can get a lot more house for your money in today’s market. “
In the end, we bought exactly what we wanted and actually spent less than we planned. And it didn’t end like this just because we’re cheap; We based our decision on our shared beliefs and goals.
But the principles that have led us to a cheaper home don’t just apply to us; they could also apply to your situation. There are some really good arguments against borrowing as much as possible. Here are some of them:
What goes up can come down
Decades ago, most people believed that house prices would go up forever. I remember my mom telling me years ago that when she and my dad bought their first home, their realtor urged them to borrow as much as possible.
“The more you buy, the more appreciation you will find over time,” they were told.
And that idea made sense back then. Because land is a scarce commodity and a growing population will always need a place to live. In theory, real estate prices should go up forever. The problem? Just because they should doesn’t mean they stay that way.
Indeed, the 2007-08 housing crisis proved that market corrections are inevitable. Although some regions remained relatively unscathed, house prices across the country fell by an average of 30%. According to Forbes, some of the most overvalued real estate markets, like Las Vegas, saw property values decline by as much as 60% from 2006 to 2011. And other large markets followed suit. For example, the Chicago area saw house prices decline 40%, Detroit a 50% correction, and Phoenix house prices fell as much as 56%.
If you are planning to live in your home forever, you may not care how much your new home is worth. But what if you have to move?
Do you need an example? Imagine this: Two families are buying a house in the same neighborhood. Family A is dropping $ 400,000 on their dream home, while Family B is only spending $ 200,000. If house prices drop 20% in the next two years, which family will be better off? (Note: Family A would lose twice as much equity as Family B – a difference of $ 80,000!)
How can people afford houses? A bigger house means everything costs more
But even if house prices go up, some costs are inevitable. No matter how much house you buy, the sticker price is just a piece of the puzzle. And when you buy a bigger or more expensive house, almost everything costs more.
For example, more space generally means more square feet for heating and cooling – in other words, higher utility bills. And nicer, more expensive properties almost always mean higher property taxes and more expensive home insurance premiums.
But that’s not all. A bigger house means everything is bigger and more expensive to fix. A larger roof costs more than a small one, and the more windows you have, the more expensive it will be to upgrade or replace. Floor coverings are usually billed by square meters, so more carpets and tiles always lead to higher costs. A bigger yard means more landscaping and a longer driveway means more concrete to pour. The list goes on, and all of these additional costs can add up quickly.
Children need more than space: they need money
It is true that children can benefit from a little extra space in the house. They need a place to bring friends when they come to visit and it’s always nice when teenagers can have their own room.
But do you know which is better? Having money to help your kids through college. To be able to afford a really nice family vacation every year. Having the extra cash for the essentials your kids will inevitably ask for as they age – fees for school trips, sports and activities, money for weekends, and even their first car.
Buying a home that you can easily afford can mean the difference between having extra cash for your child’s changing needs or a poor house and not being able to afford much of everything. That bonus room above the garage might be nice, but not so much considering what it was to give up.
Don’t forget to save up for everything else
Speaking of giving up, the extra cash for a bigger house payment has to come from somewhere. By and large, Americans have big houses but tiny bank accounts. According to a recent survey, the average middle class worker has average savings of around $ 20,000 for retirement. Additionally, a full third of working middle-class adults contribute nothing to retirement – not in a 401 (k), Roth IRA, or any other retirement vehicle.
The poll in question, conducted by Harris Poll, which took part in 1,001 middle-class adults aged 25 to 75, also proved that we are not good at planning. According to the results published in USA Today, around 55% of participants planned to save more for retirement in old age to make up for any deficits.
If ever there was a bad idea, it would certainly be. Why? Because compound interest takes time to work its magic – and the later you start saving, the less power it has.
Put simply, if you want to retire someday, you have to start saving today – or maybe yesterday. If you don’t, you will become sad across the board or postpone your retirement altogether. Put simply, if you buy a home that is unaffordable, you have less money to spend on your future you.
Your mortgage doesn’t have to be forever
Most people get a 30 year mortgage and pay that monthly payment until the cows get home. Unfortunately, that usually means they never actually own a home until the bitter end.
But wait – do people really stay in their homes for another 30 years? According to the National Association of Home Builders, the answer is no. In fact, recent data shows that the average family only stays in their home for about 12 years.
So if you opt for a 30 year mortgage every time you move, it can easily mean that you will make that monthly payment for your entire life. Thrifty friends, is there anything more depressing than that?
Fortunately, it doesn’t have to be, which leads me to the next reason why it makes sense to borrow less than you can afford. Of course, the less you borrow, the faster you can pay it off. And if you’re buying a home that is on the lower end of your budget, you might even be able to afford the monthly installment of a shorter-term home loan.
Imagine paying off your home within 15 years and having all the financial freedoms you could afford. Big, expensive homes may have their own perks, but being debt free will be priceless.
When life happens you are prepared
Health, youth and job security are often fleeting. In other words, the amazing standard of living you are now experiencing is not guaranteed to last. Additionally, a 2014 study showed that up to 25 million middle-class families are living on paychecks, meaning they may be just one illness – or one job loss – away from losing it all.
Take a look at the monthly financial obligations you have and wonder how you would meet them if you or your spouse lost your job, had a serious accident, or had some other hardship that resulted in lost wages. Would you be fine Could You Afford Your Bills Easily? If the answer is no, then you should try buying less homes than you have now, and certainly not more!
The bottom line: tragedies happen every day, but if you allow some breathing space in your monthly budget, you will be much better equipped to endure them calmly. And if something unfortunate happens to one of you, one small, manageable payment can make the difference between keeping your home or losing it all.
Should i buy a house?
Most mortgage lenders believe that your total debt shouldn’t be more than 36% of your total gross income in any given year. So when deciding how much to borrow, use this number as a guide. While other liabilities like car payments, child support, taxes, and insurance can drive that amount up, 36% is still a pretty generous starting point.
The thing is, even the best mortgage lenders don’t know what kind of lifestyle you are living. It doesn’t know if you want to help your children with their studies or if you’d rather go on two family vacations each year. You’ve never heard the talk about your dream of retiring early and spending your golden years the way you wish. To them, you are just one number on a page. And they’ll be long gone by the time you realize you’ve bitten off more than you can chew.
Therefore, it is up to each of us to decide what we can really afford. It is up to each of us to set a price range that we can live with, not just today but tomorrow as well.
It all boils down to choices; If you’re spending less than you can afford, you have it, and if you’re spending too much, you don’t have it. Remember to look past this year and even this decade as you make this choice. Maybe you are giving up more than you think.