Dream Home or More Affordable Payment? Which is Better?
You’re faced with two options: buy your dream home, or settle for less but have a lower payment.
You can be pre-approved for a bigger payment than you’re comfortable with. It's tempting to buy at the top of your approved limit.
Most financial conservatives will say “don’t do it!” but they don’t think of the consequences of buying not enough home.
On the other hand, few people buy their dream home first. It can take decades to get there, and that’s okay.
Forget previous advice for a few minutes. Let’s look at the pros and cons of both stretching your budget, and buying below your means.
Pros of Buying The Most Home Possible
The “most home” could mean larger, more bedrooms, closer to work, or newer. All these qualities come with a premium.
But they could be worth it.
Own The Home Longer
It’s ridiculously expensive to sell a home and buy another one. This is the biggest advantage to buying at the top of your pre-approved range. Selling a home costs about 9% of its value including agent commissions, taxes, closing fees, and more. Around $36,000 on a $400,000 home. That does not include moving expenses, time off work, and closing costs for the new home and mortgage. You could be out $50,000 or more if you outgrow your home too quickly.
Better Lifestyle
Whether you value entertaining guests, a shorter commute, time with family, or all of the above, a more expensive home can deliver. It’s hard to put a price on getting home from work 30 minutes earlier each day.
Other Things Cost Less
Owning a more expensive home can save you money on non-mortgage expenses. For example, you might spend $200 less per month for gas because it’s closer to work or $50 less on heating and cooling because it has better insulation. Weigh the costs of going cheaper.
Pay Less for HOA Dues And Taxes
Some neighborhoods are cheaper because they have higher taxes. It could be worth spending more on a home to avoid sending that money to the county. Likewise, homeowner’s association (HOA) dues can make a condo nearly as expensive monthly as a house.
The Payment Could Be More Manageable Later
Those who are young in their careers will likely see their incomes grow. Your mortgage payment, which stays more or less the same, soon becomes a smaller percentage of your income.
Larger Tax Advantage
If you itemize deductions, a larger mortgage helps you pay less in taxes. Chat with a tax professional about your after-tax cost of homeownership.
Cons of Buying The Most Home Possible
Financially Stretched
No surprise here. Your mortgage payment could eat up too much of your monthly budget. You will think about overspending more than you used to.
Easier to Rack Up Debt
You could rack up debt for daily expenses – at astronomical interest rates – if you spend more than you make. That could ruin your credit and cost too much in interest.
No Room for Error
Even a short time off of work or an unexpected expense could force you to tap savings, your 401k, or a credit card.
Lower Savings and Retirement
A large house payment limits your ability to save. Owning a house is a great forced savings plan, but those funds aren’t easily accessible.
Pros of a Conservative House Payment
Less Risk
You have a greater chance of making your payment during a loss of income.
Less Stress
You’ll have lower monthly expenses and a larger savings account. You’ll also get to go on vacation, eat out, and enjoy hobbies more.
Invest More
You can build an investment portfolio or retirement account faster by allocating more dollars each month toward these goals.
Better Bang for Your Buck
Sometimes the worst house on the block is the best value. You don't overpay for curb appeal. The home could shine after some TLC.
Cons of a Conservative House Payment
Could Cost More in the Long Run
As mentioned, it costs about 9% of the home’s price to sell it. If you outgrow the home too quickly, you’ll spend much more than you would have by buying a more suitable house in the first place.
Harder Time Selling
Whatever made the home less desirable to you won’t change for the next buyer unless you address the issue. In a down market, the home could be hard to sell.
Buyer’s Remorse
Remorse can hit any buyer, but if you realize you settled for less than you wanted, the home could become a constant disappointment. At that point, it would have been better to keep renting.
How Much Is Too Much Home?
Everyone has a different tolerance level for debt, risk, and costs. It’s up to you to decide your maximum comfortable home price. That should start with a budget.
Use an app to analyze your spending over the past three months. Does your current budget or one you create leave enough room for your proposed house payment?
Don’t look at the principal and interest only. This is a common mistake for first-time buyers. Factor in property taxes, homeowners insurance, and HOA dues. An all-inclusive mortgage calculator can help.
You’ll also experience increased costs of homeownership like larger utility bills, repair expenses, lawn care, and more.
It’s okay to stretch your budget, but not before knowing all the true costs.
There’s No Magic Number
You’ll hear plenty of rules of thumb: a home price 4x your income, a payment of 25% of your take-home pay, etc.
Lenders typically let you borrow up to around 36-40% of your gross income on the house payment and as high as 45-50% on housing plus all debts. You could use this as your gauge.
However, don’t get too hung up on formulas.
In expensive markets, you may have to spend a large percentage of your income for a modest home. Someone in a low-cost market may not understand that you can’t get into the housing market without a large payment.
Each person should examine their own situation, housing market, and tolerance for risk to decide on how much house is “too much.”
See How Much You Can Afford
If you’re curious how much you can qualify for, connect with a lender. You can, at the very least, get real-world numbers and start figuring out your optimal home price.
