My husband and I bought our home in April of 2007. We had been looking for several months before we found a great house at a great price that February. It was a foreclosure though, so the entire process took a couple of more months after our first offer. In the end, we accomplished our goal of buying way less house than we could afford.
Why We Wanted Less Than We Could Afford
As some of you may know about me, I don’t like debt. It makes me itchy. So my biggest reason for wanting an inexpensive home was so that we could pay it off as quickly as possible. Our second reason was that we wanted a mortgage payment small enough that we could afford to pay it even if one of us lost our job. Our $114,000 house fit the bill.
The $92,000 loan was low enough that we will be able to pay it off in 10 years or less without too much stress. Plus the $740 monthly payment for 15 years in the beginning was doable in case of job loss. The new refinanced $504 payment is even better. We overpay to $900 every month religiously, but we do have that extra $400 to play with now if the need ever presented itself.
Other Benefits
We were approved for a $160,000 loan to start with, but then we wouldn’t have been able to put 20% down right off the bat. I appreciated having solid equity in our home even when the housing market crashed in 2008. It is nice to have that equity available as another backup in case we ever have to use more than our $15,000 emergency fund can handle. I rather take out a home equity line of credit right now than be forced to sell stocks when they are at their lows.
Another big benefit of affordable housing is the complete lack of stress. We never have to worry about making our monthly payment. It’s small enough that we could even keep our house for more than a year and a half if we both lost our jobs. That means that even if my husband was thrown out of the school system at the same time blogging became unprofitable, our emergency fund, Roth IRA’s, and stocks could keep our bills paid (including the mortgage) for more than 18 months if necessary. I love that sense of safety.
Avoid Buying Up to Your Limit
In short, I would highly suggest staying well under the amount you could afford to spend to buy a house. Yes, a $160,000 home might have been bigger or better in some way to our $114,000 home, but we may have had more financial stress in our lives. Our house is big enough and new enough to provide for all of our needs without needing any money poured into it. The nice extras we may have passed up wouldn’t have been worth the extra stress to me.
How about you? What do you think of buying less home than you can afford?
The following is a post from staff writer Crystal Stemberger at Budgeting in the Fun Stuff, where she writes about finding the balance between paying your bills, saving for your future, and budgeting in the fun stuff along the way.
We did the same thing. When we started the process of buying a home we were allowed double what we bought our home for. It completely amazes me that it was that much. We figured out what kind of payment we could handle first and then went from there to finding a mortgage that fit that.
Sounds just like us.
I don’t like debt either. We have been paying down our mortgage and my fiance sometimes talks about buying a lake home, which then I remind him- do you want to retire in your 7 years debt free or not?
Our mortage has 7 years to pay off. The same time as he retires,
LOL, my husband mentions more room and I mention more debt…
We did the very same thing with our first house which we are still living in.
We pay double our monthly payments plus I usually put the maximum 10% lump sum payment against the principle once a year as well. We’ve also increased our payments a couple of times (still paying double). We’re coming up on five years having owned the home and we will have it completely payed off within the next couple of months.
We did this for many of the reasons you did because we thought we might be on a single income because of either job loss or going back to school. As it turns out, my wife took 2 years off to go back to school and I also lost my job recently but fortunately we’ve always been able to continue with our higher payments even during these periods of restricted income.
Once we’re both working again we’ll be looking to upgrade to a much bigger house now that we have a sizable down payment.
Sounds like you two had a plan and stuck with it, congrats!
I would definitely agree. Once I find a house I would like to buy, I will make sure to purchase one that I can readily put a 20% down payment on and it will be way under what they tell me I can afford. Ideally less than 18% of my income wil go to the monthly mortgage payment.
Sounds great! Good luck!
Buying a house that cost less than 30% of your gross income is really important, but that’s hard to do if you make 1. an average or even upper-middle class income AND you 2. live in a really high cost of living area like the SF Bay, Boston, or New York City. I watch HGTV and I cannot believe what real estate costs in places like Texas, Georgia, the Midwest, etc. But most people are not that rational (I’d include myself in that group) when deciding on somewhere to live… especially when family is involved.
My husband and I talked about the prices in some coastal cities and decided that we’ll be sticking right here…howdy y’all. :-)
Our house cost the exact same price, and we overpay to $875 every month. Funny!
Sometimes I get house envy looking at bigger fancier houses, but always end up feeling great about our little house (and mortgage!)
I’ll have to check out your post on refinancing, we looked into it and figured that after closing costs the savings wasn’t worth it and we’d just keep making higher payments with our current rate.
We figured the same thing, but then Chase offered us free refinancing – no closing costs or anything. Then it was a no brainer. Otherwise, it’s costs outweighed the benefits.
I buy based on current income and the payment should equal no more than a week’s wages. When you start thinking of the raises you may receive to pump up the amount you can afford, you are in dangerous territory. My daughter did the same thing when she bought her condo. Since then she and I have refinanced and even lowered the payment. You avoid getting into financial trouble.
Yep, staying in the super affordable range is just great. :-)
Crystal,
Great concept! Along those same lines is to rent for less than you can afford. While a person/family is saving up for a house they could rent something that is below what they rate and save the difference. When it comes time to purchase something with mortgage debt they won’t have to borrow as much because they will have the full 20% w/o having to pay PMI or having to get some crazy no-money down loan.
I guess the similarities between our ideas are to be debt averse, live below our means, and save the rest for the future.
Keep up the good work,
Eric
My first house was definitely around 30% less than what I could have afforded. I was nervous and didn’t want to overextend myself. In retrospect, I think it was an OK decision. What people fail to realize is that as you get older, you make more, and that nut you have to pay looks smaller and smaller over time.
Best, Sam
Love the sentence: “That means that even if my husband was thrown out of the school system at the same time blogging became unprofitable, our emergency fund, Roth IRA’s, and stocks could keep our bills paid (including the mortgage) for more than 18 months if necessary.”
The mistake one often makes is judging your financial risk based on one thing going wrong, versus real life, where many things go wrong at the same time.
Great post – I wish I could find a house for that cheap. Unfortunately in the greater NYC area, houses are much more expensive. Maybe I will have to look into moving. :)
I hear NJ is not so far (across the river) and much more affordable.
People sometimes get pulled into the idea that their home is an investment and it doesn’t matter how much they spend on it. Sadly this isn’t the case. While home ownership is an important part of financial security, the house you live in is definitely not the same as an income property. With your own home you are the one paying down the debt while with an investment property someone else is paying the debt. It’s a very important distinction.
I think a home is an investment of sorts. You don’t rent stocks either but you are on the hook for purchasing them.