I got into a conversation a few weeks ago about the idea of “stretching” to buy a nice home. The idea that was given to me was that it’s worth it to pay a little more than you might want to right now, in order to get a house that’s a bit out of your comfort zone financially.
The justification was that over time, your income should go up, while the mortgage payment will be fixed. Thus, what seems like a big payment now based on what you see in an E-Mortgage calculator will seem much smaller later. Additionally, the idea went, if you buy a bigger home up front, you won’t have regrets later.
This isn’t the first time I’ve heard this. And just like I did that prior time, I argued against the notion of stretching once again.
Admittedly, I think that I might be in the minority when it comes to such a belief. When I bought a condo way back in the day, I was in the majority of first-time buyers that simply didn’t fully understand all the nuances of mortgages, they payments that go along with them, and where they can fit into your overall finances. Luckily, I ended up selling the thing for a small profit. Hooray! However, there are clearly some people who weren’t as lucky, and got burned.
My guess is that they didn’t run the numbers, didn’t have a household budget, and didn’t really plan enough for the payments. What I think many people with financial literacy issues do is just listen to what the lender tells them they could afford. Then, they spend that much. After that, they just try to figure out how to live on the rest.
Why? Good question. My guess is that for many people, a home is an overly emotional investment. Somehow, it’s looked at as worth spending a ton on because it’s a place you’re actually living. Or, there’s an assumption that a home is always a good investment. Or, perhaps, some people still think that the bigger the interest payment, the bigger the tax benefit, thus take out a big loan (NO!).
Whatever the case is, I think it’s important to separate emotions from the decision to buy a home, as much as realistically possible. More importantly, think in terms of wants versus needs.
- Is it truly necessary to buy a newly constructed home, or can you live in a 20 year old house?
- Do you actually need that 4th bedroom, or can you make do with 3 bedrooms?
- Does your lot have to have a huge yard, or can you live on less space?
- Do you really need to have granite counter tops, or can standard counters work for now?
By thinking about wants vs. needs, we can truly be willing to understand that when buying a house, we’re making purchasing tradeoffs just like we do with other decisions. The difference is that the stakes are likely much higher here.
You can end up spending a ton more money to get something you want vs what you need, and end up having to work harder and for more years to make those extra payments on the wants versus the needs. Plus, as we’ve seen, homes aren’t always liquid assets, and they can actually decline in value quite a bit in the wrong circumstances.
Bottom line: While emotion and preferences of course have a place in the home purchasing process, I think it’s important to buy a home primarly based on logical needs, not emotional wants. To those who think that this takes away from the enjoyment of life in some way, I’ll come back by saying that it probably enhances the enjoyment of life, as you’ll have less pressure and more free time due to having to spend less money on the home.
My Questions for You:
Do you think it’s a good idea to stretch for a more expensive home, or do you think it’s best to find a home that fits your current financial situation very comfortably?
Do you also think that many people let emotions get in the way when buying a home, or do you think that a home is a much different type of purchase in which emotions are a big part of it?