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When my husband and I set out to buy a home 10 years ago, we made sure to get preapproved for a mortgage so we'd know what size loan we were eligible for. That way, we'd be able to conduct our home search more efficiently, and avoid falling in love with a place we couldn't afford.
In the course of our search, we saw many nice homes that would've been great places to live. But we passed on most of them and instead opted for our home for two reasons -- first, because it was new construction, and we wanted the chance to design our own space, but secondly, because the cost of that house was well below the amount we could actually afford. And it's the latter point that's been a huge help over the past decade.
Why you should buy less house than you can afford
As a general rule, it's best to limit your housing costs to 30% or less of your take-home pay. That 30% figure should encompass not just your actual mortgage payment, but also your property taxes and homeowners insurance. To play it even safer, you might even decide that that 30% limit should include ongoing maintenance, too.
For context, the home my husband and I bought resulted in us spending about 15% of our take-home pay at the time on mortgage payments, property taxes, insurance, and predictable maintenance -- things like having our lawn mowed, gutters cleaned, and driveway sealed.
Why shouldn't you spend more on housing? It's simple: If you exceed that 30% threshold, you might struggle to cover your remaining bills, not to mention your homeownership costs themselves. And that puts you at risk of racking up dangerous credit card debt, or even potentially losing your home to foreclosure if it becomes too difficult to afford.
Spending less made sense to me
When we bought our house 10 years ago, the country had barely recovered from the massive housing crisis that caused countless families to lose their homes. I'd seen how buying too expensive of a house could lead to very negative consequences, and I wasn't eager to repeat other people's mistakes.
But also, I wanted more financial flexibility. When we bought our house, my husband and I didn't have children, but we knew we wanted them. What we didn't know, however, is what they'd cost us. By keeping our housing costs on the lower side, we bought ourselves some leeway so that when we had to start paying for child care, we weren't completely strapped for cash.
Buying a home well below the top of our price range has also allowed us to achieve other important financial goals through the years. For one thing, we've been steadily funding our retirement accounts, even with my income being variable (a common side effect of being self-employed). And we've managed to start a college fund for our children, too. I don't know that those things would've been possible if we had bought a more expensive home.
Finally, buying a less costly home gives us the option to spend more of our money on things that bring us joy, like traveling the country, enrolling our kids in enriching (but expensive) after-school activities, and enjoying nice meals. I know plenty of people who would rather spend an extra $400 or $500 a month to have two extra bedrooms or an expansive kitchen, but we'd rather spend our money experiencing life outside the walls of our home.
How much should you spend on a home?
If your dream home falls at the very top of your price range, there's nothing wrong with buying it as long as you can afford it (meaning you won’t be spending more than 30% of your take-home pay on it). But before you rush to take out the full mortgage amount you qualify for, think about having extra money on hand and what that will do for you on a long-term basis. If anything, spending a bit less on a home could help you avoid the stress so many homeowners face.
Remember, too, that you never know what direction life might take you in. You could decide to change careers and lower your income in the process. Or you might end up having more children than you initially planned for. Spending less on a home means having more flexibility on a whole.
I'm very happy with my decision to buy a home that fell well below the maximum I could swing. It's made life far less stressful, to say the least.
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