My wife and I have recently started looking at properties for purchase. Since we live in an area where everyone seems to buy a house immediately after high school, we’ve seen many of our friends make foolish decisions when it comes to their first home purchase.
The final decision often comes down to the “big house” with all the stainless steel, and the “moderate house” which will suit all the needs of the couple perfectly, but with a little less sparkle than the other. Of course, these two homes are not within the same price range: the one that shimmers and shines is most likely at the very top of their price range, and the other house is a starter home that is easily affordable.
The Main Argument for Stupidity
“If we buy this house, we’ll never need to look for another house again. We’ll live here forever. Therefore, the added expense will be worth it.”
If you’ve ever purchased a house, I’m sure you’ve heard yourself saying this. It sounds great and all, and almost sounds reponsible. But, in reality, it’s just another want, and after a while, it’s just another house.
Clearly, I’m in favor of purchasing a modest house. It doesn’t need to be flashy or sparkly. It just needs to keep the rain out and stay relatively quiet so you can sleep at night. The price should be modest enough to pay off within 10 years or less. That way, you’ll never feel the stress of those mortgage payments. You’ll always have extra cash “just in case”.
But What If We Do Live There Forever?
I understand that some of you might be ready to purchase that expensive home that you recently fell in love with. I’m not saying ‘don’t do it’, but let me shine some light on what you’ll be missing out on.
Those that purchase a house at the top of their price range become what I call, “house poor”. They pay in such a large amount to the bank every month that they do not have any extra cash to enjoy life! They throw away all their fun so that they can live in a cool looking box. Don’t believe me? Check it out.
Calculate the Extra Cost
Let’s say your amazing house is $225,000 (which is the absolute maximum amount you can afford) and the modest home is $130,000.
Since the amazing house is stretching your budget, you have no choice but to pay off the loan in 30 years. Assuming all of your payments are on time, after 30 years, you will have paid $410,414 (and that’s with a low 4.5% interest rate).
With the modest home, you can afford to pay it off more quickly and choose the 15 year loan (with an interest rate of 4.2%). After those 15 years, you will have paid $175.442.
- Big House = $410,414
- Modest Home = $175,442
Let Me Show You More
When you first looked at the home prices, it didn’t seem like it was that different did it? But, after looking at the amount paid with interest, you suddenly realize how big of a decision this really is!
Since the moderate house costs $234,000 less than the big house after interest, I began to think, what kind of fun could you have for that amount of money (and notice, the big home purchase allows for no fun…for 30 years).
So, there’s my list up above. It was actually kind of tough to spend that amount of money, so I threw “vacation home” at the end to spend the remaining $90,000. Which looks more fun? The modest home or the big house? 🙂
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.