Buying a new home is an exciting adventure, especially if you will be a first-time homeowner. It means you will be putting some roots down somewhere and becoming part of a community. Your new home will be a place where memories are made and where you will spend the majority of your time.
If you are currently flipping through real estate books and dreaming of the day when you are handed the keys to your new home, the question of how much home you should buy is probably on your mind. While it’s easy to get caught up in the dream of owning a big home that will be the envy of all of your neighbors, not everyone can afford their own fairy tale castle.
There are two schools of thought on home ownership. When asked for advice, many are told to buy as much home as they can afford because their homes will be investments that will increase in value over time. And others say to only buy as much home as you need and that becoming debt-free as soon as possible is a preferable goal.
Which option is the better choice? How much house should I buy?
It depends on your goals in life. There are both pros and cons to each option, and it’s worth exploring them more so you can make an informed decision.
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The Pros of Buying a Large Home
For our discussion, I’ll define a large home as being more home than you currently need. After conducting significant research on owning a large home, I could only come up with two distinct benefits.
- You Can Build Equity
One of the most common reasons why people choose to buy more home than they need is to build equity. The idea is to take out a lengthy loan – typically 30 years – and the home will increase in value over time.
This is definitely a valid argument since homes tend to appreciate at a rate of between three to five percent each year. And if you live in a place where there is a hot housing market, the value of your home could rise dramatically.
- You Can Grow Into It
Another benefit of buying more home than you need is that it gives you room to grow. Maybe you want to have kids in the future. Or perhaps you like having room for your fur babies to run around in. In recent years, many people have transitioned from working on-site to working from home. A spare bedroom can easily be turned into an office.
With a large home, you will have more storage room and possibly a spare room for guests. Most importantly, you will have room to breathe. You can engage in a hobby, watch TV, or do something else without bothering those who live with you.
The Cons of Buying a Large Home
While there are some benefits to owning a large home to consider, there are also many downsides to big homes as well.
- It Usually Requires a 30-Year Loan
A major negative to consider with buying as much home as you can afford is that you will most likely need to take out a lengthy mortgage – 30 years is typical. Since most people spend just under 40 years of their lives working after they graduate from college, you will be spending the majority of your working years paying for your home.
- You May End Up with Too Much Extra Space
If you buy more home than you need, you may end up with too much extra space. While it may sound like a good problem to have, the extra money you’ll have to spend to heat and cool unused rooms could become a problem. Some people block the air vents in spare rooms to save money.
- You Could Overextend Yourself
When signing on the dotted line to buy their new homes, many people are mainly concerned with earning the money they need to make their monthly mortgage payments. But sometimes unexpected expenses occur that need our attention, like medical bills, car repairs, or something else.
If you don’t have an emergency fund or your budget is tight, those extra bills could really hurt if a large portion of your earnings goes towards paying your monthly mortgage.
Another thing to consider is the sudden loss of a job or an economic downturn. Millions of Americans, for example, found themselves unexpectedly unemployed when the Great Recession hit and their homes suddenly become worth much less than the mortgages they were repaying.
- Higher Utility Bills
The more home you buy, the higher your monthly utility bills will be. It’s a lot more expensive to heat and cool a 4,000 square foot home than a home that is half the size. In addition, you may also have to pay more for water, sewer, and other expenses.
- More Expensive Repair Bills
You can expect more frequent (and more expensive) repairs with a larger home. Some homes are so large, for example, that they have more than one HVAC system. Although it’s nice to have a backup if one suddenly goes down, these systems typically only last 15 years, and both units will eventually have to be replaced.
If you’re trying to save some extra money, use this Beginner’s Guide to DIY & Home Repair.
- Higher Property Taxes
Cities, towns, and counties obtain the majority of their money by levying property taxes on homes and businesses. If you fall behind on your property tax payments, you could lose your home. Although the ethics of foreclosing on a home for a relatively small amount of back taxes is a debatable subject, it is a reality that many people face every day.
- More Rooms to Decorate
If you have more home than you need, you will most likely have to buy more furnishings and decorations for it. You may even feel compelled to furnish and decorate the rooms you aren’t using just in case people drop by and you want to give them the grand tour. Furnishings and decorations can become a major expense if you aren’t careful.
- Wealth Taxes
Some localities levy extra taxes on large homes. The idea is that if people can afford large homes, they can probably afford to pay more in taxes.
- There Is More to Clean
It takes a lot more time and energy to clean a large home than it does a small one. Do you really want to spend your days off from work cleaning your home, mowing your lawn, and doing other chores? Yes, you can always press the easy button and hire people to do these things for you, but it’s just more money down the drain.
- Your Home May Take Longer to Sell
If you own a large home and you want to sell it, your home may sit on the market longer than a smaller one. This is because there are fewer people who can afford expensive homes than more modest homes.
- You Will Pay More Interest
The longer your mortgage, the more money you will pay in interest, which is the money you pay the bank for the use of the money they lend you. If you take out a 30-year mortgage for $200,000, you will pay far more in interest over the life of the mortgage than if you had taken out a 15-year mortgage for the same amount.
Many people are surprised to learn how much they will be paying in interest over the life of their mortgage. For example, if you take out a 30-year mortgage for $200,000 at an interest rate of 3%, you will have paid $103,555 in interest when you finally make your last payment.
You can do an internet search for a “mortgage calculator” to input different loan amounts, interest rates, and terms to find out how much you will be paying in interest for any loan you are considering.
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The Pros and Cons of Buying a Small Home
Most of the benefits of buying a small home are the opposite of the cons of buying a large home. For example:
- Lower mortgage payments
- Lower utility bills and repair expenses
- Lower property taxes
- Easier to clean
- Easier to sell
Similarly, the cons of buying a small home are the opposite of the benefits of buying a large home. There is the possibility that you could outgrow your home, and it will be worth less if you decide to sell.
There is one major benefit to owning a smaller home that is worth exploring further – and that’s the possibility of paying off your mortgage and enjoying the benefits of living debt-free.
Because smaller homes cost less, you may be able to structure a shorter loan than you would with a larger home. And because your living expenses will be much less, you may even be able to make additional payments on the principal each year to pay off your loan early.
It’s important to keep in mind that living cheap doesn’t mean you have to live in a dump. Many small homes are actually very nice. It really just depends on the previous owners and how well they maintained their homes. The size of a home doesn’t necessarily determine how nice a home is – it often depends on how well someone cares it.
The Benefits of Living Debt-Free
There are many benefits of financial freedomthat are hard to ignore. Depending on your goals in life, these benefits may be more important to you than living in a large home that mainly just serves as a status symbol.
- Financial Security
One of the most important benefits of paying off your mortgage and living debt-free is to obtain financial security. This lets you live with less worry because you no longer have to stress about earning enough money each month to make your mortgage payment. Big houses are nice, but it’s hard to put a price tag on peace of mind.
- More Free Time
If your home is paid for, you may be able to work less and have more free time for yourself. This would allow you to spend more time with your family, take up a hobby, or spend more time relaxing and recuperating from work.
- Less Stress
A major advantage of living in a debt-free home is that you may be able to eliminate a lot of stress. The constant worry of having to make an expensive mortgage paymenteach month can be a major source of anxiety, especially when you have a terrible boss and you hate your job.
Eliminating mortgage stress from your life could lead to better health and an improved lifestyle. Your relationships with others may also improve.
- You’ll Have Extra Money to Save and Invest
Monthly mortgage payments are many people’s biggest expense. If there is no longer any need to pay a lot of money to a lending institution each month, it could be used for other purposes. You could use it to build an emergency fund, for example. You could also consult with a financial planner and start working on building your retirement nest egg. Retirementcomes sooner than many expect.
- You Could Start a Business
No longer having a monthly mortgage payment means you could have a great deal of freedom and extra money to pursue other interests – like starting a business. Most businesses require startup capital, and you could save the money you previously spent on your mortgage to invest in your dream. If your business is successful, you may be able to pursue it full-time, be your own boss, and put an end to working for someone else.
How Much House Should I Buy? – Final Thoughts
Some say that there is such a thing as “good debt,” as though becoming a servant to a lending institution is somehow a good thing. But debt is debt – it is money that must be repaid in full and with substantial interest.
There are numerous benefits to buying a modest home and working towards paying it off as soon as possible. Becoming debt-free can free both your time and finances and help you reduce a great deal of stress. If you own your home free and clear and the economy takes a nose dive (which it periodically does), you won’t have to lose any sleep at night wondering how you’re going to make your next mortgage payment.
Ultimately, how much house you buy is your call, but it’s worth taking the time to carefully weigh both the pros and cons of buying a large or small home before you sign on the dotted line. Selling a home that doesn’t work out isn’t as simple as trading in a vehicle. The more expensive your home is, the more difficult it will be to sell. And if you try to sell a home during a recession, your home may not sell at all.
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