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Buy less house, not more

The road to financial freedom starts with a mortgage payment that's less than what you can afford.

By MSN Money Partner Jun 28, 2012 3:13PM

This guest post comes from Glen Craig at Free From Broke.


Image: Home Exterior (© Corbis)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, the more expensive your home is, the less likely you are to ever attain 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?


House determines general consumption patterns

Most homebuyers hyper-focus on monthly payment as the main barometer of affordability. But owning a 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 where you eat. 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 compared with living in 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.

Post continues below.

High payment denies you options in 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. Yes, 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 such situations seem to be only more common these days -- a job loss, an income reduction, a medical disaster or any other 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.


Oversize 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 your monthly house payment is well below your maximum affordable level.


Lower mortgage, faster payoff

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.


More money in house means less 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. Many people will go right up to that number on the payment to determine what house to buy.


But let's say you decide that you aren't going to commit 28% of your income to your house payment, and 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 an 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 pay off a typical mortgage -- you'd have just over $1 million saved.


Would an extra $1 million help you attain financial freedom?


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?


More from Free From Broke and MSN Money

Jun 29, 2012 10:53AM

Yes, we bought a house much lower than we could afford and this move has made all the difference toward our goal of financial freedom.  We max out matching 401ks and Roth IRAs.  Right now, we are dumping our 15 year mortgage for a 30 year: payments will be reduced to $800 including taxes and insurance; doing this, we can last over ten years on our savings if both of us lose our jobs, or we can pay the mortgage with jobs from Macs; moreover, we can always pay the mortgage off whenever we want to; the issue here is more and better options; our options are huge.  I had to fight all the"professionals": the real estate agents, usually economicaly ignorant; the financial analysts, usually greedy.  We win by being modest.  Next issue is how to buy cars that will last 20 or more years and yet remain stylish.  The next best thing to a well managed, affordable mortgage is 20 years without a car payment: one can afford a lot of gas even at $4/gal when no there are no car payments.  Here is the rule: "The home you own and the car you drive determine the energy you burn; this, determines where all your money goes in our culture; beat this and you win."

Jul 5, 2012 4:23PM
Hey MSN Money, you need to give Glen Craig a job. That's the first good financial advice posted on this site in a long time. Of course the pressure by "big money" to can his **** for daring to write articles that make sense would result in a short career.
Jul 6, 2012 9:58AM

i bought my first house because with 20% down the monthly payments were about the same as rent.  i gained equity.  i sold it 5 years later rolling the equity into the next house, which was also about the same price as rent.  i sold it 10 years later rolling THAT equity into the next house, which also was now LOWER than typical rent.  now 12 years later i'll own the house in full.  the return on this house will be perhaps 30 more years of rent free living. 


compare the home price against rent.  THAT's what you have to pay each month. 

Jul 5, 2012 11:47AM

Then there's living in crackerbox apartments for 25 years and buying the (new) house for cash. The 25 years weren't fun then but a funny thing happened when they ended: They're fun now. And the house is also.


I know, I know, doing this is not being a good American. If you don't shop until you actually drop, and aren't maxed out financially with survival predicated on tomorrow being better than today, you're just not doing your share.


But I look around me and see that the "American Dream" is really more of a nightmare. Glad I woke up from that one before I hit the ground.

Jul 6, 2012 12:02AM
One of the most intelligent articles I have read on this web site.  I think of a house as a LIABILITY, not an asset( I'm a CPA).  That is especially true after the Recession evaporated over 40% of the value of the house I bought in 2002.  Still hasn't come close to recovering that loss and its almost 5 years since it all started.  And the cost to maintain a house can get frustrating, from constantly rising property taxes to rising repair and maintenance fees,  ever increasing insurance premiums, utilities, upkeep, etc. More than once I wish I never paid the $515,000 original cost.  10 yrs later the value is $380,000.  But... I did buy a house that was below my means.  Payments on our 15 yr loan are $3000 a month after 20% down.  Our payment is only 6% of our monthly income.  And if this horrible return on my house bothers me, I can't imagine how it bothers someone whose payment is 28% of their income. 
Jul 6, 2012 10:56AM
$1 million  in 30 years is not worth what it is worth today.  All financial sites due to self interest want you to spend your extra money on stocks and mutual funds even in this economy.  Show me a mutual fund that after expenses returns 6% consistently... and 30 years is a long time.  Maybe buying gold, maybe paying off your mortgage is a better option. 
Mar 20, 2013 5:06AM
While the author makes several good points, he ignores opposing facts to make his case seemingly stronger. And that's where he loses me.

The last few paragraphs, he talks about saving $1,000 per month at a 6% return over 30 years. Well, if this is an extension of his example of buying a $250K house versus a $500K house, he's implying you'd just lose that $1,000 for 360 months if you bought the more expensive house.

Even with a VERY conservative annual appreciate rate of 4% over 30 years, this same $1,000 in the house would yield $700K+ in equity. Then, factor in the reduced income tax from the mortgage deduction and you can assume - easily - an additional 2%+ appreciation.

And this is all assuming you don't pay off the mortgage earlier.

Also, with taxes, you'll need more than the $1,000 in income to invest to have $1,000. You receive no tax savings on the investment as happens with mortgage interest deduction.

To me, there's a reason why 80%+ of all millionaires in the past 50 years have generated a good chunk of their net worth in real estate.

While I'm all for saving, and I do... the leverage one receives in real estate is unmatched in any investment. You get 100% of the return for a fraction of the cost the entire time you're paying off the property. And, you reduce your taxable income in the process.

Jan 21, 2013 4:13PM
I agree it is good to buy a home you can easily afford.  At the same time, I make 2 to 3 times the income of others in my neighborhood and I plan to buy a more expensive home and go further into debt.  When I retire I want to live in a place I enjoy living.  I plan to have good equity in my current home and put an additonal $50K down on my new house. I may have to borrow $100K.  I have considered the higher property taxes and I plan to buy in a different state that has much lower property taxes than Ohio and no state taxes.  I guess it depends on what you mean by most expensive house.  If you make $200K per year, you could easily afford a home for $300K and you could pay this home off in 10-15 years. If you make $50k per year you should not buy a house that costs more than $100K.
Jul 5, 2012 11:24AM
"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, the more expensive your home is, the less likely you are to ever attain financial freedom."

I strongly disagree.  When you buy a house you are leveraging the bank's money at a very low rate of interest, aided by income tax reductions.  For example, if you bought a $200K house and put $20K down and the value rose 12% in three years, YOU get the entire 12%, not 1/10 to you and 9/10 to the bank based on how much each of you has in the house.

Consequently, if you can afford a $400K house, even if the value only increases an average 3% per year, much of the growth in value is based on the bank's investment, not yours, yet you get all of the growth.

As the years go by, the strain on your budget caused by the mortgage payment becomes less and less -assuming you got a fixed rate mortgage- because the P&I of the mortgage does not change.  After a decade there's a good chance you're paying less than you would otherwise be paying in rent.

Finally, will you have the discipline to save the money you don't have to pay into the mortgage if you get a cheaper house?  That house is, if you're typical, your biggest asset.  You could sell it in retirement and buy a smaller home or move into an apartment.  You could do a reverse mortgage, etc.
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