Monday, September 29, 2008

Buy Less House Than You Can Afford

#4 Saving Money Tip - Buy Less House Than You Can Afford. Common practice when buying a house is to find out how much mortgage you can qualify for and then buy at that price point. But I disagree. Do you really want to be stretched so thin? Buying a house is exciting and of course you will get "wowed" by beautiful homes - those at the top of your budget and those above your budget. But it won't be much fun to live in a house that you can just barely afford. Or to live in a house that you cannot decorate or to not be able to go out to dinner once in awhile. And if you're young and buying a house before you have children, consider what you plan on doing if you have them. If one of you wants to stay home when you have kids, then you definitely do not want to buy as much house as you can afford. Buy a house a little smaller, a little less polished.

A great way to buy a house is to see past the 1970's carpet and wallpaper. Pay more attention to the neighborhood, lot size, location, and size and layout of the house than to the decorating in it. The beauty about buying a house that needs cosmetic changes is that you can make them when you can afford them. Ripping down wallpaper is tedious, of course, but it's something that can be done pretty cheaply. Same with paint and carpet. Another reason to buy less house than you can afford is that you really don't know what the future will bring, and it's better to have a cushion of money than not. And if by some stroke of luck or hard work you find that you have more money than you thought you would, you can always add on, move, remodel, etc. Too many people, however, buy as much as they can afford at the time. Then down the road one of the couple loses a job or the wife wants to stay home with their new baby but they cannot afford to. This is a position you do not want to be in. If you plan ahead for these types of unforeseen circumstances by buying less than you can afford, then you will have more freedom in what you can do with the extra money. And if you find you need the extra money to pay your mortgage, at least you will have a roof over your head.

In Real Life (IRL) - My husband and I (no kids) bought our house 8 years ago in a fairly expensive city. My husband was new to the area so he was shocked at how expensive homes were. At the time, a small 3 bedroom 1 bath 1950's ranch home was in the mid $250's (which now seems awfully cheap, actually). We qualified for a house well over $300K that probably would have had 4 bedrooms, but I was hoping to only spend about $250K. Problem was, while we were satisfied with only 3 bedrooms, we wanted a 2nd bathroom. Most of the houses we looked at did not have a second bathroom or it was in the basement. We looked and looked in our price range but could not find one that met this criteria. So finally we did what most people do, we looked at higher priced homes - those up to $300K.

Okay, so we did what I'm telling you not to do and that's why this section is called IRL. Well of course you can guess what happened we found our "dream" home. It had 3 bedrooms, and not 1 bath, not 2 baths, but 2 1/2 baths! Oh and it was priced at $309K. And I did what all real estate experts tell you not to do - I fell in love with the house and I made it mine mentally before it really was mine. But back to the point of buying a house with 70's wallpaper. We were lucky, this house, while on a beautiful lot on a quiet cul-de-sac with more than 1 bathroom was decorated, well, not so good. One room was painted a bright red and I mean bright almost fuchsia. Another had loud blue-flowered wallpaper. And there was no furniture in any of the rooms to show how it would look furnished properly. For some reason this lovely home with not so nice decorating had been on the market for weeks (which was long for that time period; houses were selling very quickly) and had not received one offer. So we low-balled them with an offer in the $250s which of course was rejected. But after going back and forth we agreed on a price of $290K! $40K above my target price, but remember it was less than we qualified for. And we still did have a cushion of money. We had $90K saved up to buy a home and only used $70K for the down payment. That $20K went to an emergency fund and is in fact still sitting there.

We were lucky, not only because we bought when the market was a bit lower than it is now, but because we found a house that needed cosmetic changes that other potential buyers poo-poohed. After we had a contract, the interest in our house grew and others wanted to buy it. It took them a little bit longer to see past those ugly red walls and that blue-flowered wallpaper. Looking back it was one of our best purchases. Because we paid for the neighborhood - a nice lot on a quiet street. That stuff doesn't change. The rest? The red paint is now beige. The blue wallpaper is still there - when we put our furniture in it, it didn't looks so bad. And that 3-bedroom house that was smaller than the 4-bedroom house we qualified for? We decided to turn our porch into a fourth bedroom when we found out we were having our 3rd child last year. Because we bought less than we could afford, we were able to save money each month and put it away. This afforded me the luxury of staying home with my children when they were young. So even though we went above my preconceived budget, we did buy a house less than we qualified for. We knew we had emergency money and we planned on me staying home if we had children. And because we bought a smaller home, we were able to do all that.

1 comment:

Pia's blog said...

I'm actually looking for post regarding home buying. Thanks for sharing this.
Pia | homes for sale in philippines