A mortgage lender may pre-approve you for a large amount, but there are good reasons to buy the least expensive house that you can afford. This can be difficult, especially since most of us want our dream home, but even if you can afford the dream home, it might be wiser to scale back and spend less. Here are seven reasons to buy the least expensive house that you can afford.
1. Reduces Your down Payment
If you’re looking to reduce your out-of-pocket expense when buying a house, this is one of many reasons to buy the least expensive house that you can afford. Unless you're getting a VA or a USDA home loan, your lender will require a down payment of at least 3.5% to 5%. Down payments are based on the sale price of the home, therefore, the less you spend for a house, the smaller your down payment.
2. Spend Less on Closing Costs
Additionally, buying a house involves paying closing costs. These costs are also a percentage of your loan amount. Closing costs range from 3% to 5% of the loan. Like your down payment, you can keep your out-of-pocket expense to a minimum by purchasing a less expensive home.
3. Frees up Cash
Understandably, buying a home is one of the most important purchases you’ll make. For this matter, some people feel that it's okay to splurge on a house, even if it means that most of their income will go towards the mortgage payment. To each his own. However, there are benefits to buying the least expensive house that you can afford. To put it plainly, the less you spend on a house, the lower your mortgage payment. And the less you pay your mortgage lender each month, the more cash you’ll have for other things, such as building your retirement or emergency fund.
4. Possibly Pay off Your Mortgage Early
If you buy a house at the top of your budget, this can eliminate any option of paying off the mortgage loan early. However, if you purchase the least expensive house that you can afford, you might be able to increase your principal payment each month. As a result, you can possibly reduce your mortgage term by years.
5. You’re in a Better Position to Handle Income Changes
Right now, you might have plenty of income to afford a higher mortgage payment. However, your financial standing can change quickly. If you buy a house at the top of your budget, it might be harder to maintain your mortgage payment if you were to lose a job or experience a drop in income. But if you buy a less expensive house, this can provide a little wiggle room — just in case.
6. You Can Avoid Being House Poor
Just because a mortgage lender says you can qualify for a specific amount doesn’t mean you should accept a larger loan. Be sensible and consider what you can reasonably afford. On paper, it might look as if you can manage a huge monthly payment, but given your other household expenses — such as groceries, utilities, daycare and insurances — splurging on a larger mortgage could leave you house poor.
7. Keeping up with the Joneses Doesn't Make Sense
What's the point of buying a house to impress others if you might have trouble paying your mortgage each month? Keeping up with the Joneses is common behavior among some, but it can also be very destructive. Stop worrying about others and do what's best for your pocket.
Buying a house and deciding how much to spend is a big decision. And although your emotions may influence you to buy a house at the top of your budget, it's important that you make a logical decision and do what you can reasonably afford.
How were you able to stay in budget when buying a house?