Is achieving financial freedom an important goal in your life?
If it is, don’t follow the conventional wisdom of buying the most expensive house you can afford.
Sure, by buying the biggest house you can afford you can grow into it, live in it longer and maybe even avoid a costly trade up in a few years. Fair enough.
But when it comes to achieving financial freedom, buying the most expensive house you can afford is the exact opposite of what you want to do.
In fact it can be said that the more expensive your home is the less chance you have of ever attaining financial freedom.
Expensive homes and financial freedom are what you might call “mutually exclusive”—having one reduces your chance of getting the other.
How could that be?
A house determines general consumption patterns
Most homebuyer’s hyper-focus on monthly payment as the main barometer of affordability. But owning a certain home is about so much more than the mortgage payment.
The more expensive the home, the more it costs for everything connected to it. That includes property taxes, insurance, utilities and maintenance of course, but there’s even more.
The type of home you live in often determines the kind of car you drive, the clothes you buy, the vacations you take and even the restaurants you eat in. Buying a more expensive home in a more expensive neighborhood is like instant lifestyle creep!
More expensive homes are usually located in more expensive neighborhoods and more expensive communities. Consumption patterns are often socially driven, that is, we tend to buy in ways similar to the people in our immediate social orbit. It follows that you’ll buy more expensive everything if you live in a $500,000 home as compared with a $250,00 home.
Not only do you pay more for the house, but you pay more for everything else each year that you live in the home.
A primary component of financial freedom is keeping your living costs low—an expensive house will hurt that effort on nearly every front.
A high house payment denies you options in a crisis
I think it’s fair to say that most people are pretty optimistic when they buy a home—no, let’s say they’re extremely optimistic when buying a home.
Yeah, that’s better.
Where am I going with this? If you’re optimistic, you buy the most expensive house—with the biggest monthly payment—you can afford. But what happens if you hit one of those unfortunate life situations we can loosely refer to as a reversal?
That can come in any form and they seem to be only more common these days than they have been in a very long time. I’m talking about a job loss, an income reduction, a medical disaster or any event that results in a decline in your financial situation.
The smaller your house payment, the more easily you’ll weather the storm, and the more quickly you’ll recover from it.
Reversals come in life—what really matters is maximizing our options to deal with them.
Since your house payment is probably the biggest single expense you have, the lower it is, the more options you’ll have for dealing with any crisis. The sooner you can put a crisis behind you, the sooner you can get back on the road toward financial freedom.
An out-sized house can increase debt
A house that’s at the upper end of your affordability range will leave you with less money for everything else.
The less money you have for everything else, the closer you are to going into debt. I’m not talking about your mortgage here either.
Since consumption patterns are heavily influenced by the size and cost of your home, it follows that if your house is at the upper end of your affordability range, it’s more than a remote possibility that everything else in your life will be too. That’s living on the financial edge, and people who live in that gray zone have a high propensity to use debt to fill in the financial gaps.
If you live in a less expensive home—meaning a home that’s well below your maximum ability to qualify—your overall cost of living will be lower and you’ll be less likely to need debt to pay for anything.
One of the foundations of financial freedom is being debt free; that’s much easier to achieve when you’re monthly house payment is well below you’re maximum level.
The lower your mortgage the faster you can pay it off
If you buy a home that’s beneath your means it follows that the mortgage on the house will also be lower. The smaller your mortgage, the easier it will be to pay it off ahead of schedule.
Owning your home free and clear is a big step toward financial freedom.
The more money you sink into a house the less you have for investing
In the mortgage world, the rule of thumb is that your fixed monthly house payment should not exceed 28% of your stable monthly income. Most people will go right up to that number on the payment to determine what price house to buy.
But let’s say you decide that you aren’t going to commit 28% of your income to your house payment—you’re going to cap it at 18%. If you make $10,000 per month, you want to limit your house payment to $1,800, even though you could go up to $2,800 per month and buy a much bigger house.
By making the choice to keep your house payment low—and to live in a much less expensive home—you’ll free up $1,000 of income each month. That’s and extra $12,000 per year!
If you invest $1,000 each month in mutual funds at 6%, at the end of 30 years—the time it would take to payoff a typical mortgage—you’d have just over $1 million saved!
Would an extra $1 million help you attain financial freedom?
Finally
Lower living expenses, more options in a crisis, less debt, paying off your mortgage sooner, an extra million dollars or so—can you see how financial freedom starts with a lower house payment?
Agreed! Living below ones means starts with his/her housing choice.
Couldn’t agree more, great post.
Thanks Roger.
There’s a lot to comment on in this post.
I think you are totally correct in that you should go with a less expensive home. I don’t know if if I agree that a mprtgage hurts investment opportunity sine owning a home is an investment. You do make excellent points on insurance and property taxes.
I’ve always seen owning a home as a matter of keeping cash flow manageable.
These days how much of an investment is a home? Prices are stagnant right now. If you plan to be there 30 years then it can still be an investment but short-term it’s too difficult to predict how a home will be valued.
If you view the investment as how your family will be living in one particular place and town for a significant time then yes, it is an investment.
“Buying the biggest house you can afford” is not wrong, but you need to address how much you can afford. When I bought my dream house, my mortgage was only 50% of the value. I used cash for all the improvements. Knowing how much you can afford is key to financial freedom. If you take out the biggest mortgage or worse a no down payment mortgage, you have a house of cards. One hiccup an you will have problems.
There’s the big question – what do you mean by afford?
A realtor or bank may say you can afford one amount which will get you as much house as your income will allow. Then there’s your real afford which says how much money you can actually spend and still have enough for everything else.
I actually bought my first house not to long ago and it is well below my max. I love having the extra money for other goals in life. It makes things so much easier and wealth accumulation is much faster!
It’s nice not being stressed because your house is so tied up in your finances, isn’t it?
If I’d taken the full mortgage amount the bank had offered, my payment would be 50% more than it currently is, and I’d be struggling even more than I am now to balancing savings with wants. I love my house, the school district is great, and my house value is still increasing, but I’m glad I didn’t spend any more!
You just made me think of something – you hear how it’s OK to buy a lot of house since you should expect to be making more money some years from now but you know what? You have to expect taxes to go up too and you can’t always predict how that will be. Having a tight budget off the bat can turn ugly quickly if the town you are in has a large tax increase.
This is why I bought a fixer upper and a small home! It’s hard to go from furnishing / decorating an apartment to a mansion…
Great point! When you get a big house you almost feel compelled to fill it up, don’t you? And furniture isn’t cheap. Even painting gets more expensive.
We have a big house, but it is a drafty old fixer-upper in a small, rural community that we have filled with hand-me-down furniture. It would feel very freeing, except that we owe more in student loans than we do on our house!
We’ve rented out two bedrooms in our house to roommates. Their combined rent, $1100 per month, pays most of the mortgage — plus they share 1/2 the utility bills. Granted, this arrangement wouldn’t work for everyone … lots of people don’t like the idea of living with roommates into their 30’s. But it’s definitely nice to have someone else pay the mortgage! I should add that we went to great pains to pick the “right” roommates — quiet and clean.
I have a question, when referring to a keeping your mortgage payment at say 25% of your income do you include the cost of property taxes, and home insurance? or are these considered separate costs?