When it comes to buying a house, the conventional wisdom is that you should buy the most expensive house you can afford. The thinking is that you buy a house that will provide you with extra growing room, and that your income and financial resources will grow into the house as time goes on.
I don’t think it’s a stretch to say that that kind of thinking probably contributed substantially to the housing meltdown in the last few years. Fundamentally, too many people were living in houses they could barely afford. They ignored the question, “how much house can I afford“. But even aside from the meltdown, there are solid financial reasons why you should actually want to buy the least expensive house you feel comfortable in.
Keeping your basic living expenses low
Financial problems often start with high basic living expenses. The most basic of these is your monthly house payment. If the house payment is high, other expenses seem to follow suit. There are higher utility costs, higher repairs and maintenance, and more money spent on both cars and furniture to decorate the house.
The most basic component of a successful financial plan is living beneath your means, that way you’ll have money left over for spending and investing over and above your basic living expenses. If your house payment is on the high side, it will be almost impossible to lower these expenses unless you plan on selling your home to downsize later. It’s better to do that up front when you buy your first (or next) home than to be forced into it at a later date.
More flexibility in a financial crisis
One of the best reasons to keep your basic living expenses low is that you have plenty of room to maneuver in the event you are beset by a financial crisis. The crisis could be anything from a loss of a job, to the failure of a business, to a rash of large medical expenses. By having low basic living expenses – including your housing expense – you’ll be in a better position to deal with any financial crisis that might come about.
One of the reasons so many people have lost their homes in foreclosure is because they were tightly stretched on their house payment to begin with. Once other financial problems affected their lives, there was simply no room to make house payments anymore. You can avoid that situation by buying a house that’s beneath your means.
More money for savings and investing
A house is one component of successful financial planning but it’s far from the whole story. Perhaps even more basic is having money for savings and investing. The key to financial success is growing your wealth over time. It’s far easier to achieve when you have more income available for savings and investing because it isn’t tied up in basic living expenses like housing.
Tip – If you are interested in automating your savings for a home purchase or other purpose, why not consider Betterment? They make it easy to reach your goals by putting your investing on cruise control. They also have a neat site that shows you how much you need to save in order to reach your goal.
Having more money for savings and investments not only improves your long-term financial situation, but it also provides liquidity in the short run. This is exactly what will be needed in the event of a financial disaster. The extra liquidity that you will have from increased savings can save you from having to make hard choices relating to your lifestyle, including the house you live in. More money usually means more options, and that’s a goal worth pursuing by itself.
Faster, easier payoff of your mortgage
There’s actually a twin advantage here. The less expensive home will mean a smaller mortgage. And that means it will be far easier to pay off your mortgage much faster. Lower house payments will mean that you’ll have more money to make extra principal payments to accelerate the payoff the loan. This is not something you’ll be able to accomplish if you’re having to stretch every month in order to make the basic house payment.
The second advantage is that if less money is going into the house payment and more of it is going into savings and investments, you’ll more quickly reach the point where you have a bankroll large enough to payoff your mortgage completely at a future date.
You’ll also have the benefit of having a choice as to how you will handle your mortgage payoff. A low monthly payment certainly opens up the possibility of additional principal payments. And a growing savings balance will enable you to either payoff your mortgage in large chunks, or to pay it off completely at the date of your choosing. You can also do any combination of the above. The point is the choices will be yours, and they will come about because your house payment is relatively low in relation to your income.
What’s your thinking on this? Do you think it’s best to adhere to the old advice of buying the most expensive house you can afford? Or do you think we’ve entered into a time when we need to be thinking differently about this, in buying the least expensive house possible?
Neal Frankle is a Certified Financial Planner with more than 25 years of experience, author of the Wealth Pilgrim blog, and a featured contributor here on the “CIF Blog”!