Everyone knows that a home is a major purchase, but most people don’t take the big picture view when they take the plunge.

Did EGO get in the way (subconsciously) when you made a home purchase? We know that we are judged by our house and that gets in the way of making a wise financial decision. “But I’ve got an expensive home, I must be doing really financially well in life.”  “I’m successful.”

First time home owners are blinded by the magical excitement, the thrill of owning their very first home! Buying what they think will be their “dream home” early in life is just so emotional that many people get sucked into making a dumb choice.

Just like everybody else, first time buyers ask a mortgage lender, a realtor, or maybe use an online calculator to figure out how much they can afford as they dig into their home search.

That’s their first mistake.

You see, using that monthly affordability number will help set your sights on homes and a mortgage that is way more expensive than what is in your ultimate financial interest. Is it crazy to think that people are prone to overspending on their home? No

Why relying on housing “affordability” assumptions can break you in the long-term.

For starters, those numbers will be often be based on two incomes if both spouses are gainfully employed. That leaves much less flexibility for either person to take a reduction in income due to a career change. If a couple is currently both employed and they start a family, the financial and home related pressures sky rocket. First, either one spouse has to cut back or stop working (they may very much want to do this) or second they have to pay for day care. Unfortunately, many couples don’t factor this in the initial “home can we afford” decision.

On a side note, many couples think that day care will be their solution BEFORE they have their first child. Every parent knows their heart grows ten-fold when they have their first baby. The love and attachment is often over whelming, such that they want to stay home with their baby. Again, if they bought their first home based on their joint income, this can add serious financial and marital stress to their relationship. I know this happens to many people and it is very unfortunate, especially when it could have been avoided.

Buying based on one income and an amount significantly less than the affordability numbers a mortgage lender allows makes much greater financial sense to me.

You see buying a home creates liabilities. I really don’t look at a home as an investment. Sure, it may sell for more than you paid for it, but when you factor in all the annual expenses it creates, it’s more often a financial loser than winner. I have done this anyway with my own home. I don’t necessarily regret it as I like my neighborhood and our family has loved it. The return on family life while not quantifiable, has been terrific. Maybe it would have been just as good in a cheaper place…. I’ll never know. Financially speaking, your home is an asset, one that may cost you thousands of dollars more into than what you eventually sell it for.

Let’s look at an example;

If you bought a $600,000 home in Glen Ellyn in 2005, your home may not have appreciated at all since then. You may be paying about $12,000 per year in property tax. That adds up: 13 years of property taxes averaging $10,000 per year equals $130,000 in property tax with little or no appreciation. In addition to that there a ton of other home maintenance expenses you had to fork over. This is not to say that you shouldn’t buy a cute home to enjoy, but rather buy well UNDER YOUR MEANS to give you a leg up on flexibility and financial success.

The pre-retirement benefits of buying well under the lender affordability guidelines are fantastic. Some of these include:

• Career flexibility –
  • It should mean that one of you could stop working if you wanted to raise kids
  • You could change jobs , even take a take a lower paying position that might make you happier
• Lower property taxes on less expensive home
• Less pressure to keep up with the Jones’ on things like how you furnish your home, the cars you drive, the preschools you send your kids to, the clothes and other things you are expected to buy for your children – If you have kids, you know what I mean!
• More discretionary money – not “house pour”
  • Money for vacations
  • More money to save for retirement or college, or whatever you want in life

Imagine if you bought your first home at age 30 and instead of taking out a $300,000 mortgage you took out a $200,000 mortgage instead (less expensive home) creating a mortgage payment that was $500 per month smaller. If you invested that $500 every month and earned 8% on that money you end up with roughly $750,000 in 30 years!  Add in an extra $200 month for property tax savings and you could have an extra $1,000,000 over that 30 year period!

These same concepts don’t just apply to first time homebuyers. The same mistakes happen with every house purchase. When you buy a high priced home (relative to your income) later in life the same issues are there, only the pressure to save money for kids college costs and retirement are in HUGE competition with house related expenses.

Ask anybody in their 50’s what’s keeping them up at night. “How are we going to help our kids with these crazy college costs and are we ever going to have enough money to retire.”

Most of the time, I believe the reason for this is over spending. Not just on your home, but all the things that go with it (bills and keeping up with Jones’). The Jones’ issue includes furnishing the house, having a fancy car or SUV in each slot of the three car garage, hiring a landscaping company for yard work (even when you have kids that could do it), dressing your kids in more expensive clothes, etc.

I did well, but could have done better:

I could have bought a home two miles east in the next town over. The same size home in a nice neighborhood, in the same high school district for probably $200,000 less than we paid for our current home seventeen years ago. From the math above, had I saved the difference in the mortgage payment and property taxes savings I would be hundreds of thousands of dollars ahead of where I am today!!

The worst part of the over spending on a home later in life (40’s or 50’s) is that not only does that leave less money to save for retirement and other things, but for many people they cannot afford to stop working/retire and live in the same home because they have a mortgage payment due into their late 60’s or 70’s.

Downsizing is not an option, but a necessity. That’s not the worst thing in life, but I know of lot of my parent’s friends still live comfortably in the same house they raised their family and it’s quite nice. In some cases, not having a mortgage due on their home has allowed them to travel much more in retirement or in some cases afford a vacation home to escape to in the winter. This group of people had much less financial stress in their life in large part because “ego” didn’t have much a role in their home decision. These folks were the opposite of “Big Hat, No Cattle”. You could never tell based on their material possessions, especially their house, that they have a seven figure net worth.

In summary, my goal with this post is to create awareness of the importance of your home purchase and the huge financial impact and ripple effect it has on your financial life and the quality of your life. It will impact your future career choices, your spending habits, your ability to save money, travel and anxiety over your finances for the rest of your life.

We can’t easily change our current home choice and we should focus on the many positive, non-quantifiable benefits from living in our current homes. If you are in the market for a new home, I hope you will consider what I have said and let this information wash over you as you make that next major life decision.

The Big Lie