One of the more frequent questions I get asked as a mortgage loan officer is: “How big a home can I afford?”
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That is a very different question from the one I recommend new home buyers, especially first-time home buyers consider: “How big of a home should I buy?”
It is a subtle, but important distinction. I can probably get you approved for a monster house and the house payment to go with it. But, in most cases that amount can leave you on a shoestring with no margin for error.
Before you dig in on this when bigger isn’t necessarily bigger, you might want to read a similar article my colleague wrote: Starter Home Versus Dream Home.
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Are there circumstances when bigger isn’t better for home buyers?
There are lots of circumstances where bigger isn’t better for a home buyer. Some of the most common I run across are ordinary life circumstances. A new career, a single professional, or a young family that might naturally need to move or upsize as their career or family grows.
On the other end of the spectrum are families and careers that are beginning to downsize. Families that are sending kids off to college or into life, soon to be empty nesters or people winding down careers and soon to be retirees.
These folks might be looking to make a move to be closer to family or just don’t need a larger home anymore.
Then there’s the savvy real estate investor. This buyer is often looking for a home that can consistently produce rental income, which means it needs to serve the broadest housing needs. That is most typically a smaller “starter” home. It’s important not to get confused here and think bigger is more rentable.
It seems that everyone thinks they need bigger but is that what will make them happy?
Nothing causes more stress and unhappiness than the strain of finances. A mortgage on a home that is a size too large is most likely to be your biggest burden and hardest one to overcome. Happiness is often one size smaller than your “dream” home. That way you can enjoy your home without dreading your monthly mortgage payment.
Under what circumstances do you advise people to go smaller rather than larger?
I’m often recommending a smaller home for the following types of home buyers:
- First time home buyers – These buyers are often unaware of how much home they can actually afford and are the most likely to get starry-eyed over a dream house.
- Young, career-minded professionals – They want a big home because it often represents a savvy financial decision and checks off a benchmark in their list of successes, but these hard chargers are often on their way to bigger and better opportunities. These new opportunities are either going to force them to sell and move or put them in an even better financial position for that big house. Better to go a little bit smaller now and go big later.
- Real estate investors – New investors often buy too big. The most successful real estate investors I know invest in a lot of small homes in a diverse set of communities. Median market priced home tend to provide the most consistent and stable occupancies and rental revenues.
- Empty nesters and retirees – Many of these folks are moving nearer to family or just downsizing. But, often they still tend to buy a little more house than they need because they’re trying to accommodate that one-off occasion when they are hosting the whole family. I often recommend they find a cozy place and payment for themselves and make the kids and grandkids host them.
What things do people need to consider when it comes to picking the size of their home?
Here are my top five things that I recommend people consider in picking their home:
- Is this my forever home or my right now home? What is the likelihood that I will be moving in the next three to five years? Consider your career and your family situations when determining this likelihood.
- What is the most typical size home in the community I intend to live in? Homes larger (or smaller) than this median size home are going to be the hardest to sell and most volatile in price. Staying in the middle is your best value.
- What does my income look like over the next five to ten years? Am I early in my career and therefore my income is more likely to increase steadily or even dramatically? Or, am I middle to end of my career in which my income is likely to either flatten or decline?
- What does my family look like? Is it just me? Are we a young couple? Do we expect to grow with kids or maybe as a caregiver in the future? Are we shrinking as kids leave home? Often the need for a larger home is a very small percentage of a 30-year mortgage, or you will move once or twice during that expansion and contraction. Does it make sense just to spend a few years in a little tighter quarters rather than paying a much larger mortgage when you don’t need all the space?
- What’s more important in your lifestyle: a big home to host and entertain or more money in your pocket to go and do things outside of your home?
Questions? Comments? Talk to me on Twitter @billrice and please include a link to this article.