The majority of Americans will purchase a home sometime throughout their lives. This decision and housing, in general, is one of the most important financial decisions that someone will make. It usually requires a greater share of your income than anything else in your budget. You definitely want to equip yourself with the appropriate information needed to make a sound decision. If you make a mistake with housing, it can be on a larger scale and have greater consequences for your future.
I believe that one of the biggest financial mistakes that American’s make is that they buy TOO BIG of a home.
By stretching their budget they end up tying up a large share of their income for up to 30 years! It is not necessarily that they can't “afford” the home. But, they can’t afford the home AND the costs of achieving other financial goals they might have.
This may be a reason why the typical American has too much debt, not enough emergency savings, is behind in saving for retirement, and has anxiety about their finances. They have their house, but their housing costs have squeezed their budget so they have no room left over for other important things.
What if you wake up one day and don’t like where you are financially. You say to yourself, “Starting today, it is going to be different!” And you begin to make some changes in your life.
If you have a large mortgage and other housing costs tying up a huge percentage of your income, this is going to be pretty difficult. You can’t just decrease your monthly loan payments. You are obligated to pay them for years to come. Whatever spending you cut, it will probably be difficult and involve some pain.
One option for you is to cut your housing costs by selling your home and downsizing. Are you willing to move into a smaller house? Most people aren’t willing to make that sacrifice.
I contend that you buy a home that you can EASILY AFFORD in the first place.
There are many rules of thumb that help define what a person can AFFORD. Those are good tools. But most of them are established by the banking industry whose definition of being able to AFFORD a home is that a borrower has little danger of defaulting on the loan.
Not going through foreclosure should not be your definition of success! You want to be able to buy your home AND achieve your other goals!
So I encourage you to be more conservative than those rules of thumb. If you buy a home that you can EASILY AFFORD you will have the ability to save for retirement and other goals in your budget.
Would you rather…
Would you rather have a large home that is impressive to others but not be able to achieve your other goals, or have a small home and be on track to retire when you want, have a good emergency fund, and low amounts of debt?
Given these two alternatives when looking ahead in your life, I will argue that the second one will be a better financial journey and require less stress!
If you start small, you will be able to stay on track with your other goals which are important to you. If you are willing to wait, eventually you will be able to move into larger homes throughout your life. Your home will be a reward instead of a burden! You can have your cake and eat it too!