I was able to buy my first home at 27 years old in 2015. It didn’t hit me how big this was until I was signing 100 pages of paperwork the day before I got the keys. It was at that moment I realized how happy I was with my decision to buy less than I could afford. Once I was pre-approved I was approved for roughly $300,000 based on income and credit. The house I bought was only $179,000, nearly half of the total pre-approval amount.
Early on in the process I realized I never wanted to over extend myself on my mortgage payment. Sure everyone wants to live in a huge house but I recommend starting small for your first home. Home owning can be difficult, time consuming and expensive. The smaller your place the less that can go wrong and less money you’ll need to spend on maintenance.
With my first house I didn’t want to have my monthly payments increase much from my current place. My rent at the time was roughly $1,100 per month, including utilities. When I got pre qualified I had the lender price out different rates to give me estimated payments. I was able to get my mortgage $1 less than my rent! Obviously I paid 20% of the house in a down payment but my monthly payment wouldn’t increase in the next 30 years. The four years previous when I was renting the monthly costs increased from $20-40 per month.
Here are the five biggest reasons why you should purchase a smaller house for your first home:
Home Values Decline
Big house = big mortgage. Use 2008 as a brutal reminder that real estate can go down, sometimes overnight. There is always the possibility your home will decrease. Historically home rates have increased 3-5% per year but there is still is a chance of your home declining in value. If you bought in 2008 you probably over paid and nearly ten years later it might be back to the original amount you bought the house. But it still might be below. This is a risk of homeownership, it sucks no question.
If you overspend on the house you will have a large mortgage payment. By overextending yourself you might be cash poor and potentially not saving enough elsewhere. A high mortgage can lead to not saving enough for your future retirement or not saving towards other goals.
Rule: Don’t spend more than 30% of income on housing costs!
A home is great because it gives you security and peace of mind. What it doesn’t give you is cash value. It’s not like other investments where you can pull money out if you really need to. Your house is not an ATM, the only way to pull money out is to refinance which has costs associated as well.
Hope For The Best, Plan For The Worst
If you quit your job tomorrow would you be worried about getting another job that would pay your current mortgage? I put more money towards my down payment so my mortgage would be relatively low. By putting 20% down I was able to eliminate PMI (property mortgage insurance) and keeps the payment lower. The more you put down, the lower your payment will be. My joke is always “I always wanted to own a house that was so cheap I could be a manager at Taco Bell and still make the payment.” With Ms. Super Millennial pitching in 40% I pay $700, a month. Based on the signs I see at my local Taco Bell I would be able to make that payment no question. If I lost 65% of my salary overnight I’m confident I would be able to make the payment without worrying at all.
Filling The Rooms
When I moved into my townhouse it was from a 1 bedroom/1 bath to a 2 bedroom/2 bath, roughly 400 square feet more. I figured I’d get a desk it wouldn’t cost much to furnish the rest. But even though it was only a small increase it still cost me over a thousand dollars to furnish it. Once you sign the mountain of paperwork to buy a house, the money isn’t done spending yet. Consider this when buying a house!
- Futon/couch ($300)
- Desk ($200)
- Bookcase ($100)
- Home decor ($500)
- Total: $1,100
If you read my previous post, Homeowners 1 year anniversary, its clear that no matter how good of condition your house is in during the inspection it is inevitable things will break down or need repairs. By having a bigger house you will have a higher likelihood of more things that will need repair. I had to replace one air conditioner at nearly $6,000, imagine if it was a house that two units like many do in Arizona?
Matching your lifestyle (keeping up with joneses)
People love buying stuff to impress others. If you buy a big house there is a good chance that you will try to match the rest of your life to a higher lifestyle. It’d look weird to park a 20 year old car in front of a big house. This can lead to overspending and not sticking with a budget. The snowball effect will continue since you won’t be saving towards retirement.
Do you agree or disagree? Why or why not? Let me know in the comments…