Published May 4, 2018|4 min read
I was recently playing around with a mortgage calculator when I made a shocking discovery. After plugging in my personal details, the calculator said I could likely afford a seven-figure home.
Apparently, my family income, coupled with the fact we have no car payments, credit card debt, personal debt or student loans means we could take out a $1 million dollar mortgage, provided we wanted to pay it off over 30 years. Since I live in Indiana and seven figures would buy a giant mansion, I found this idea preposterous.
But I reminded myself that mortgage affordability is largely determined using math — not facts. Mortgage calculators and lenders use algorithms to determine how much you can afford to spend on a home based on your income and liabilities. Generally speaking, they prefer to lend to people whose total liabilities don’t exceed 43% of their income.
Now, let’s get back to those annoying facts.
Fact 1: Just because a lender believes you can afford something doesn’t mean you can. Fact 2: Mortgage calculators can’t gauge your spending style or appetite for risk. Fact 3: Only you know how comfortable you feel about borrowing for a home.
I knew these facts before I bought my home, which is why I spent less than one-fifth of what I can supposedly afford. I wanted a 15-year home loan I could pay off even faster, after all, and I did not want to be house poor. Also, I did not want a $1 million home because it would be more than we need in the rural area where we live.
There are other reasons you shouldn’t rely on a mortgage calculator to tell you how much to spend on a home. And there are plenty of excellent arguments for spending less than you can afford. Here are the main reasons less is sometimes more when it comes to your dream home.
The bigger the home you buy, the more everything costs when it needs to be fixed or replaced. A roof on a 4,000-square-foot home will inevitably cost a lot more than on a smaller home. Plus, you might need a larger furnace and air conditioner. You’ll also have more carpet, more flooring, more cabinets and more of everything else.
In addition to higher costs for maintenance and repairs, you will pay higher property taxes on a more expensive property as well. Since property taxes are traditionally figured as a percentage of your home’s value, your taxes usually go up in proportion with what you spend.
Don’t forget about paying higher costs for homeowners insurance. The larger and more expensive your home is, the higher replacement value it will have. This means higher insurance premiums and there’s really no way around it.
In addition to higher costs for owning a larger home, you’ll also have more to take care of. You’ll have more space to clean, more to organize and more areas in your home to keep in tip-top shape. Who wants to vacuum tons of rooms anyway?
When you first move into a home, there are a slew of start-up costs that can surge dramatically when you go big. More rooms means more furniture to buy, more curtains, more wall hangings — more everything. If you have multiple bedrooms you don’t use, you may wind up purchasing extra bedroom sets for guests or furnishing them some other way that will inevitably cost you.
A bigger home requires a bigger mortgage. That means more interest charges over time, even if your interest rate is low. While a 30-year loan on a $200,000 home at 4% APR will cost $343,739 over the life of the loan, a $1 million mortgage with identical terms would cost an astounding $1,718,695.
Plus, a bigger house with a bigger payment means spending more of your life in debt. It means bigger house payments that may become stressful to keep up with — especially if your employment or income situation changes. And it could mean working longer and delaying retirement because it’s hard to quit your job when you still have a big mortgage payment to keep up with.
Should you buy all the house you can afford? You certainly can borrow all the money the bank is willing to lend, but you should never feel like you have to. You may find you’re better off spending less and keeping your options open.
Sometimes less is more. A huge mansion might seem like a dream come true, but the freedom that comes with modest living may be more valuable in the long run.
Get essential money news & money moves with the Easy Money newsletter.
Free in your inbox each Friday.