Minimizing Your Housing Costs // Don’t Let the Banks Set Your Budget

happy monday, friends! we hope you all had a swell weekend. mr. onl had two fantastic days of skiing powder, and i had one — as i tweeted saturday, i skipped a ski day to catch up on some work that had been weighing on me. but taking that day let me lift a major weight off my chest, and it was completely worth it. still, you can bet that the thought occurred to me more than once while working that i can’t wait to retire so i never have to give up another powder day! then sunday, traffic to the resorts was crazy, so we bailed and went backcountry instead. it was a little more work skinning up the mountain, but as that header photo attests, we had perfect, pristine slopes all to ourselves. sometimes bigger effort equals bigger reward. :-)

we generally don’t make it our business here to give financial advice, and there are a lot of reasons for that: we’re not personal finance professionals, we think there are a lot of ways to retire early successfully and don’t want to put too much emphasis on the approach we happen to be using, and we think it’s much more interesting to pose questions than to offer answers.

we had a conversation this weekend, however, that made us realize there’s one bit of advice we just have to share, which is this: minimize your housing costs. if you really care about reaching financial independence, your choice of home will have a bigger impact than any other choice you make, and will set you up to be on the fast track to fire, or keep you trapped in the slow lane. it’s hard to pass up the chance to have a nice house, we know — and we offer some advice on that, too, farther down in this post.

the one that got away — in the best way possible

back to our conversation, which is another one of those sliding doors moments: turns out we’ve each recently looked at our local mls to see if there are any small houses listed that would be worth downsizing into, and we were both lamenting that the small houses seem to keep going up in price while the medium houses like ours don’t go up much, meaning that, at this point in time, we couldn’t get enough cash out from downsizing to make it worth the hassle of moving. the good news is that we’re perfectly happy staying where we are, and we’ve always budgeted enough to afford to stay put forever. but somewhere in that conversation, mr. onl said, “we should have bought that house with the view.”

we bought our mountain house back in 2011, near the bottom of the market, before things started to climb back up again. in our mountain community, which is loaded with second homes, home prices took a dramatic nosedive following the 2008 stock market crash, with some homes losing more than half their value. no joke. our realtor kept telling us what a “great deal” some homes were, because at the time they were listed for $600,000, when they’d sold for $1.2 million four years earlier. um, yeah dude, but that’s still a $600,000 house. we paid waaaaaay less than that for the house we ultimately bought, but not before seeing a few others that stuck with us. there was the hilltop house with the most incredible three-story windows we’d ever seen. there was the house with the sauna in the basement. and there was the view house — a house atop some bluffs with a view that stretches for miles, overlooking mountains and water. the view house itself was fine — not amazing architecture, and the garage was detached, which is not ideal in our climate. but that view. we chose a different house more than four years ago, and we’re still talking about that view.

Minimizing Your Housing Costs // Don't Let the Banks Set Your Budget -- Our Next Life

the choice that set us up for success

why didn’t we buy the view house? you already know the answer: it was much more expensive than the house we did buy. it was listed about $200,000 above what the house that became ours was listed for. the crazy thing is that the bank would have let us borrow more to buy that house, but we’ve always wanted to be sure we could comfortably cover our mortgage on only one salary, so we gave ourselves a much smaller home budget than the banks did. in addition, buying the view house would have required us to take out a jumbo loan because, even post crash, our area is still a high cost of living area, and jumbo loans come with a higher interest rate and fewer lender options.

when mr. onl (jokingly) said we should have bought the view house, my immediate thought was: then we’d be a lot farther away from early retirement. and it’s true: even buying a house that would still have fit within the standard income to debt ratios that the banks use — in other words, a house that wasn’t a stretch, according to the banks — could have held us back in a huge way in trying to reach our financial goals. how?

  • a $200,000 difference would have required us to add $40,000 to our 20 percent down payment, subtracting $40,000 from our funds available to live on in early retirement (not to mention $40,000 that would otherwise grow at a high interest rate during the gangbuster market years of 2012 and 2013).
  • the higher price would have increased the size of our monthly payment each month, reducing the amount we could invest in the markets for the last four years, our best savings years.
  • the higher price may have forced us to get a 30-year mortgage instead of a 15, meaning a higher interest rate and a higher percentage of our payments going to interest instead of principle each month.
  • the higher price would have come with other higher prices: a higher loan origination fee and other closing costs, higher insurance premiums, higher property taxes.

buying that house instead of the one we did buy would have added years to our retirement timeline. years more work, years more work travel, and for what? would we have gotten a  structure that more adequately sheltered us from the weather? that would have contributed more meaningfully to our happiness? no. to misquote lester burnham, the dad in one of our favorite movies, american beauty, “it’s just a house!” (his line is actually, “it’s just a couch!”) sure, we would have had that view. but there’s no universe in which a view alone would ever be worth changing our trajectory toward financial freedom. but because that house fit within our acceptable price range, according to the standard lending tables the bank use, no one would have batted an eyelash if we’d wanted to buy the view house instead.

our advice for minimizing your housing costs

our society does not think of the home one chooses as a simple, functional decision. shelter? check! housing is all tied up in the american dream (or insert your own country of choice), and is too often seen as a reflection of the self you wish to project in the world. no one wants to present a dumpy shack self, after all, but we get caught up in this escalation to keep up with the joneses, or to go beyond a “starter home,” or to live in the best neighborhood. but our advice to you is: separate yourself from that pressure. just as buying a more expensive home would have increased our costs in many ways beyond the purchase price, minimizing your housing costs reduces your costs in a ton of different ways:

  • less money needed for a down payment
  • less money needed every month for mortgage payments
  • less to shell out for closing costs
  • lower property taxes
  • lower homeowners insurance premium
  • and you’ll need to save less for retirement, because you won’t have to save so much to pay your property taxes (and possibly other things like utilities, maintenance and homeowners association fees)

and the result of all of those lower costs is: you can save faster and save less for your financial independence. this is no small thing.

we’ve made plenty of financial mistakes in our time together, and in the years before we met, but keeping our housing costs low, relative to the expensive place we live, is by far the best choice we’ve ever made. here’s how you can make a good choice too:

don’t get caught up in wanting to live in the nicest neighborhood. the millionaire next door, one of our favorite pf books, analyzed data to show that people with a high wealth ratio tend not to live in the fancy neighborhoods. those who do live in fancy neighborhoods feel a lot more pressure to keep up with the joneses, which leads to more spending on cars, golf, and all the other things that go with projecting a certain image. yet another way in which a higher home price leads to a million other high prices. buy in a modest neighborhood, where you won’t feel that same pressure.

buy or rent as little house as you can. we’ve house hunted enough to know that it’s easy to see some houses and think, that bigger house gave us so many options we wouldn’t have in the smaller house. but more square feet generally means a higher price, plus other costs that aren’t always top-of-mind at decision time: more energy to heat and cool a bigger home, more space to clean and maintain, more space to fill with purchased stuff, and more space to renovate if you make improvements. remember: it’s only in the last few decades that we’ve come to believe that we need all this space. historic homes are all much much smaller than homes built today.

buy once. the idea of starting in a “starter home” (a real estate marketing term) and moving up to a bigger and better house is the established pattern, but that doesn’t make it the right one. people on the path to financial independence are used to going a different route, and this should be another case where that’s true. buy one house and stay put, unless you plan to downsize or move somewhere cheaper!

don’t let the banks set your budget. this is probably the biggest one. it’s easy to go online, find a loan calculator, and quickly get an estimate of how much house you can “afford.” and while you may be able to buy that much house without going into financial ruin, that doesn’t mean that’s what you should pay for a house. all that banks care about, after all, is how likely you are to default, and how they can make the most profit. sure, they have stricter requirements now about proving your income than they did before the 2008 housing crisis, but their business model is the same. they’re in it to make money off of you, pure and simple. so instead of letting them set your budget, calculate for yourself what you want to pay for your house. if early retirement is a possibility, consider strongly going with a 15-year mortgage, which will raise your monthly payments, but let you pay off the house a lot faster. then don’t just think about how much rent or mortgage you can afford each month — think about all of your goals. how much would you like to be able to invest each month to support your retirement? how much other debt do you have to pay off? what other costs will come with a home in that area? if you’re in a two-income household, do you want to be sure you can pay for your home on one person’s salary if you should have to, to hedge against job losses? factor all of that in, and set your own budget.

don’t pay more for “move-in ready.” this idea is not revolutionary in the hgtv era, but if the folks who appear on house hunters are any indication, plenty of people are still willing to pay more for a home that’s completely “move-in ready.” forget that term. it’s not beneath anyone’s dignity to move into a home with dated wallpaper or old appliances. unless the house has asbestos or a ceiling that’s caving in, there’s no reason not to move in and make improvements yourself, and over time, for a lot less than you’d pay for a house with those improvements already made. plus, in our experience, a lot of that work has been done shoddily, and you’ll do a better job yourself because you’ll care a whole lot more.

please chime in! anything we left off this list? any other hidden costs of buying a more expensive home? anyone buy the “nicer” home only to change your mind later, like claudia and garrett did? let us know in the comments!

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Categories: goals

97 replies »

  1. I couldn’t agree more with this advice. We concluded while searching for homes that our number 1 search criteria would be living near our closest friends. We didn’t pick our favorite city, neighborhood, or home style, but we’ve never regretted the choice. Now our children can ride bikes between the two homes and we constantly pop in and out and share life together. And buying within our means is making early payoff possible, which will make us way more flexible moving forward.

    • That’s so cool! I love being near close friends as a criterion for buying, and it sounds like you didn’t stretch yourselves to be able to buy the house you did. Thanks for sharing!

    • Neil, I totally relate here. Having moved away from friends and family a while ago, I realize this is the thing I miss the most here. Our next move will definitely try to fix that. It’s not the house that matters, but how convenient the location is to meet your goals.

      • Such a great reminder! We moved cold to a new area where we knew no one, and though we’re happy now, there was for sure a “friend ramp up period,” which we know not everyone would want to have to deal with!

  2. It is true that people tend to believe in “buy as big as you can afford” when it comes to homes. While this mistake may not be as costly as over-buying a car, it isn’t far behind. Luckily I didn’t do that when I bought my first home, but I did buy at the absolute worst time to purchase real estate in the last 20 years – February, 2007, which stands as the very peek of home prices, to the very month. Yup, I timed it exactly wrong, hence my distaste for BUYING real estate in general now. But, what’s done is done…I can’t change that now.

    I can see where move-in ready can be an attractive option and money well spent. The reason is some couples have been through renovations before, and they can be stressful – both financially as well as emotionally. They can strain relationships and generally make people unhappy. I do agree that doing the work yourself rather than paying for an already-completed renovation can definitely save some cash. But for some, that may not be worth it. Intangible costs.

    In general, I am a fan of location over size – meaning, I like to prioritize the right place (be it due to location alone, or view, or proximity to “night-life”, etc) rather than sheer size – but within reason. Like you, I probably wouldn’t spend another $200k just for the sake of a view. We are hopeful that our RV will be the best of both of these worlds, as we don’t need much in the way of space and, well, we can change locations and start living somewhere else at the drop of a hat.

    But in my view, the key to keeping costs down is keeping your STUFF down. The more crap you own, the larger the house that you tend to think you need. After all, we need to store all that junk somewhere, and the larger the house, the more stuff we can afford to keep.

    However, I’ve found that most people tend to make whatever space they have available to them work. That means buying a smaller and less expensive home will naturally result in less stuff being kept, and the owner probably won’t feel like their life is being deprived because of it. We buy stuff to fill space, and the less space we have to fill, the fewer things we tend to buy.

    In short, fewer possessions all around is how we like to minimize our housing costs.

    Great post, as always!

    • Thanks, Steve! Wow — buying in Feb ’07. Ouch. Makes total sense that that would color your view on buying a home vs. renting. And completely agree with you on stuff! I watch HGTV at hotels (cord cutters at home), and am always shocked at how much storage people are always saying they need. Clearly no one who goes on House Hunters knows about konmari. :-) But seriously — instead of making the dream about upsizing, can we make it about shedding (or not buying in the 1st place) all that stuff? Obviously you guys are going to be poster children for that once you sell your places and go full-time RV! Look forward to hearing more about that transition!

  3. So much great advice here. Our starter home is going to be our forever home – or at least until we can’t climb the stairs anymore! We chose our house based on proximity to work/family/friends. There is also a particular school district that we wanted to be part of. For the past two decades, it’s really sold houses in our area. People move from out of state into this district. But we were able to buy into the district in an unincorporated area. We technically live in a different city, but we are within the district boundaries. Our neighborhood is pretty amazing for many reasons, but we bought into that district for $100K-$200k less and into a home that was three decades newer. This is a really long, rambling way to say that people should consider all options and think outside the box when searching for this home. By being a little flexible and not being married to an address label, we got more land, a newer house, a newer neighborhood, and the school district that we wanted.

    • How clever that you were able to stay in the district without paying the high price that goes with being in the incorporated part of it! Such great advice to get creative with how to get into a certain school district. Win-win-win.

  4. If I’ve learned anything from watching literally every episode of Property Brothers (I have a problem) it’s that *even asbestos* can be handled for a few grand by a trained professional.

    Also, SO MUCH YES TO THIS! I think that all of this is such solid advice, and I think I’m going to adopt your approach if/when my boyfriend and I purchase a place – calculate it so that we could handle the mortgage on one income. Even as a fairly risky investor when it comes to my portfolio (thanks, long timelines!) I’m remarkably risk-averse when it comes to my other financial decisions, and that approach is right in my sweet spot of “if the worst can happen, because it will, we’ll be fine.”

    • Though when the Brothers ID asbestos in a house, you have to GET THE HELL OUT! :-) Property Brothers are my favorite guilty pleasure when traveling for work — if a hotel doesn’t have HGTV on their cable line-up, I will never stay there again. :-) On the price approach, I so completely advocate for setting your budget based on one salary. Even in the worst of the f financial crisis, when both of our companies were laying people off, we never freaked out, because we knew we could pay the mortgage even if one of us lost a job. So worth the peace of mind!

  5. Excellent advice – I think about that periodically. Our house is probably a little more than we need (but not excessive, my any means). We love it, but I do think that if we had bought a little less expensive house, we’d probably be just as happy and retiring a little earlier.

    I didn’t think about all the other costs you list that we would be saving on with a less expensive house as well. Oh, well – live and learn. Our mortgage will be paid off in a handful of years. I’ll have to make this one of those lessons that I teach my daughter so she starts out a little further ahead than I did.

    — Jim

    • In truth, we’re in more house than we need, too, which is why we think about downsizing. But at least we know that even with as much house as we have, we’ll own it free and clear before we retire — so that makes us feel good about the choice. And it sounds like you didn’t buy anything excessive, which is great. So as long as you stay put and don’t trade up, then no problem! :-)

  6. This is SO true! There is one thing, interest rates. I am old enough to remember when interest rates went from 7% to 22.5% in a short span. Many people suddenly found themselves with mortgage payments 2 and even 3 times higher because of the interest rate jump and found themselves unable to buy a home. Interest rates now are insanely low and there is even talk of negative interest rates (Sweden has actually done it!). However interest can swing up as well and if you are at your limit on mortgage at 3% what are you going to do if the rate jumps to 5%, 7% or even 22,5%? But if you have under mortgaged yourself you have room to adjust to an interest rate hike. Also I am very very proud of my son. When he and his wife went to the bank at refinance time and interest rates had dropped, they decided to keep their payments the same and shift to a shorter term. They changed their term from 21 years left to 16 saving them a huge amount in interest payments, with no change in lifestyle. Their house will be completely paid off by the time he is 46 if interest rates remain the same. If they go up again, he has lots of room to refinance and extend the term and keep payments the same. Today in Canada interest rates are really low but housing costs have surged up to ridiculous costs from people determining what they can afford based on a percentage that their monthly mortgage payment represents of their total income as estimated by the bank over a 30 year mortgage. Insanity! Utter insanity!

    • Oh my gosh — those variable rates sound terrifying! Thank goodness for f ixed rate loans! At least then you can plan what you have to pay. And wow — good for your son! That takes real backbone to make that kind of decision. It will feel so amazing when they have paid off their home at such a young age!

      • Maybe is different in the USA but in Canada all mortgages have renewals where the rate is changed to reflect conditions, five years, three years whatever the renewal date is, even if the loan is “fixed” for 25 or 30 years. It is not just variable rates you need to worry about.

      • Wow — I didn’t know that! In the U.S. you can get a f ixed rate mortgage or variable rate, which resets after however long. With f ixed rate, you have a set interest rate for the life of the loan — and we’re so thankful for that! But wow, with the Canadian system, you sure have an extra incentive to pay off the mortgage early, to avoid any nasty rate change surprises!

  7. We ran into this when relocating to Houston. We looked at lots of houses, and had our mind set that we would be paying around a certain price point, so we could have a bit shorter drive to work. After a few failed attempts at bidding wars, and some rather horrid home inspection reports, we woefully looked in the burbs, in an area that was still only 30 minutes from the office. We realized we could save $150k from what we’d planned to spend and be in a “nicer” house, in terms of upgrades, appliances, and neighborhood amenities. We couldn’t have ended up n a better setup to be honest.
    When we went to get approval, the banks were idiotic with some of the stuff they were asking for to give us approval. We had enough assets to buy the house outright, and they had approved us to borrow $250k more than what we ended up spending, sort of like your “view” house. I’m glad we ended up where we did and only spent what we did, because a lot of things about it worked out awesome.
    Like you, had we ended up in a house with another $150k on the price tag, we would be that much more behind in getting to FI. Losing those returns in the market for the extra down payment, and we would’ve repaired way more stuff, because those houses were older and needed lots of updates and care… It’s amazing how quickly the little things add up in maintaining a home.

    • Such a great story! See… proof that you can pay way less and end up with a better setup. We should pitch a new show to HGTV, called “less Househunters.” Haha — Okay, they probably wouldn’t go for that. They want to sell more homes to satisfy their advertisers, which means convincing people to upgrade every few years to keep feeding the beast. :-)

  8. I try not to look at my life so far with regrets, because, as my moniker suggests, I’ve been amazingly lucky. But sometimes I do wish I had learned a few of these things a little earlier! Before I understood the concept of buying one’s freedom early, we bought a nice, modest 3 Bd/2 bath in a great school district. We’re in a HCOL area, so it was tight financially but completely manageable. Fast forward 5 years and 2 kids, our incomes shot up like a rocket and we were able to expand that house to the luxurious behemoth we now own, for cash. It isn’t the reno cost that gets me, though we could have spent less and saved more (we did need a little more space, and could pay cash). It’s the higher taxes and insurance that will never go away until we sell.

    Now it’s very hard to undo what we have done. Moving doesn’t make much sense with two kids settled in school. We could move to a slightly smaller house nearby, but the wins would be minor, the hassle significant, and we are emotionally attached.

    Great post, and I hope many learn and don’t make the mistakes we did!

    • If you bought a modest home, then I don’t think it’s a mistake. And obviously school district is SUPER important if you have kids. So you can still apply the lesson by not upsizing because you feel like you’re ready to upgrade or because you just feel like you deserve a palace. I agree with you — moving is a huge hassle, and quite costly, so I don’t blame you for wanting to stay put! :-)

  9. I read this post earlier this morning and have been dying to respond. I couldn’t agree with you more regarding housing. Last year, Mr. MMM and I nearly committed financial suicide by purchasing a large home with a large mortgage in the best neighborhood to validate ourselves and impress others. Thankfully, the house had mold so we were able to cancel our contract and thrwart an anxiety attack. That moment allowed me to get back to my frugal roots and realize how fabulous our life is in our small home. The cancellation of our contract was the catalyst for my own blog and I haven’t looked back since. We’re even considering selling our small house to purchase a multi-family property in the hopes that we could live for next to free. We’ll see. Housing seems to be a theme in the PF blogosphere today. I missed the boat. I posted about yoga :)

    Mrs. Mad Money Monster

    • I love how you guys describe it — “committing ffinancial suicide.” (i don’t know why wp is having trouble with f and i together! that typo is making me crazy.) ;-) So glad you guys trusted your gut and got out of that deal when you could! Good luck getting a great multifamily home, if that’s what you decide you want to do!

      • Thanks! Yeah, I’ve had problems with the f-i combo lately. I thought it was pc. Glad to hear it’s not just me :) We’re really serious about the possibility of the multifamily. It’s just a matter of ffinding the right property in the right school district. We’ll see!

      • If you look at the other comments, it seems to be universal. So weird! I think multifamily makes tons of sense if you’re willing to share walls — hope it works out! :-)

  10. We’re still in our small, “Starter home” and intend to be here for the long-haul. If we ever move, we hope to buy a similar-sized house with cash (maybe closer to family… we’re not entirely sure what our “permanent” plan is for early retirement). And our home was NOT move-in ready. The listing bragged about the home’s “beautiful colors” – meaning the master bedroom was sponge-painted pink and the living room had turquoise wainscoting on 1.5 walls?! Because it was so horrible looking, we got a great deal… and none of that cost very much to fix at all! Always look for the crappy looking pictures… cosmetic fixers are the best. No major work, solid house, but ugly. :)

    • I love that you guys plan to stay in your starter home or one comparable in a different location. So many people upsize to accommodate kids, only to then need to downsize again when the kids leave. And haha! We have also bought a “beautiful colors” home before with PINK top to bottom. :-) And the point about photos — we feel pretty strongly that we got a great deal on our house just because the photos were bad. So even if it’s a great house, a house with bad photos will usually come with a lower price tag. (Use the reverse to your advantage when you’re looking to sell!)

      • AMEN! Our house was also just full of crap and trinkets and weird sayings on wooden pieces hung all over the place. It looked cramped, messy, and brightly colored. The pictures gave us a great deal too!

      • I have seen SO many real estate photos like that. Isn’t it just shocking that people can’t let go of that stuff just long enough to sell their house???

  11. Completely agreed! Even if you’re renting rather than buying, housing tends to be most people’s biggest expenditure category by far. When framed in terms of a monthly amount, a small increase in rent or mortgage payment might not seem like a big deal (“I can find a way to cover just a few hundred dollars more per month”), but those monthly amounts add up quickly. I know people who have sprung for $50, $100, or even multiple hundreds of dollars per month more in exchange for things as trivial as a dishwasher. I love my dishwasher as much as anyone, but $600-1,200 a year just to have one? That’s insane! In my urban neighborhood, a water view can easily add $200-300k to the purchase price of a one-bedroom condo. My thought is the same there; I would *love* to have a view, but that money is the difference between FIRE and working for years.

    • Amen, brother. A view is not worth working YEARS long! And wow — do the people you know who are paying that much more for a dishwasher know that you can put one in yourself? ;-) Ultimately we all have to decide what’s worth it to each of us, and maybe a dishwasher is THAT important to some people. But when you look at it as nicer home vs more freedom, it makes the decision to buy less much easier!

  12. Move-in ready was definitely worth every penny for us. We shouldn’t have bought such a large house, but I have zero regrets about being able to spend our time and mental energy on our careers and family rather than remodeling.

    • That’s totally fair! We have been through renovations, and know how stressful they can be, so absolutely get that it will be worth it to some of us to spend on buying a house that’s “done.” Good for you for deciding your priorities and spending accordingly!

  13. Smart choices! We are going to move in the next few years, but not until we really outgrow our current home. We have three kids (plan for a fourth) and only a three small bedrooms. The kids take up less room for now, so we’re going to wait as long as possible. However, the change in goals has resulted in a shift regarding the WHERE of our future move. I came from a pretty affluent part of town (probably part of the reason for my own “baller” years). I always assumed that we would move back to one of those areas. But lately, we’ve been talking about different areas with less taxes, more land for homesteading, and more fixer-upper homes. Mr. Smith does construction so we will definitely avoid anything that is “move-in ready.” We do need to find a good school district. Wherever we end up, we will be buying only as much house as we need and not how much house the bank tells us we can “afford.” That word got us in so much trouble in the past.

    • There are plenty of cases where moving or buying something bigger makes sense, and yours is one of them. But it sounds like you guys are being really smart in waiting as long as you can to move, and thinking about the big picture, and not just wanting a showier home. And huge kudos for setting your own budget, instead of following the bank’s. :-)

  14. One of the first things my dad said to me when I got my job is, “ooh someday you can buy a house in LA!” Uh, dream on dad! I have no desire to be house poor and it’s bad enough I pay 1150 for a semi-dumpy (although great and more importantly safe neighborhood) and it’s pretty awesome to know I won’t be tied down to a mortgage either. The American dream is so messed up!

    • Haha — Yeah, houses in LA are *beyond* what anyone could call reasonable! And we see a ton of upside to renting permanently. Glad you aren’t succumbing to the pressure of the American Dream! :-)

  15. In order for the FIRE journey to work, you indeed need the house you need, not the house you can afford.
    That being said, when w bought our house, we approached the limit of what we could afford. But this had some good reasons
    1- we decided to keep more cash for future changes to the house. This helped us add 2 rooms to the house and changing the interior after a few years.
    2- we kept our apartment for a few years to rent it out. IT was cash flow positive, so that added nicely each month. Especially once it was paid off.
    3- we had a clear rule for the house: max 1 hour commute to our jobs,max 1 hour drive to each of our parents, a garden so kids could play in it.

    About 10 years down the road, I am happy with wat we did. Not only with the buy, but also with the management of the mortgage. This is equally important: we paid down some debt to lower the monthly payment. This gave rest to the mind. We als used the downtrend in the interest fees to lower the interest costs. This might be an overlooked item for many house owners…

    • That’s great, Amber. It seems like you made good choices based on what you value most. And great job getting the interest charges down! That can make a HUGE difference in your payments and savings.

  16. Thanks for the shoutout! :) Our big house is great–plenty of money spent on upgraded finishes. And when the potential tenant looks at it this week, we hope she feels the same way! We started reading Cashflow Quadrant this week, which spelled out almost word-for-word the path we’ve been on in terms of debt accumulation. If we had taken even a fraction of the advice from your post, particularly buying a smaller home, we would have started in a better place and that “starter home” could have been our forever home.

    • Good luck getting a great tenant! It’s easy to lament the mistakes we’ve made — and we’ve ALL made some! — but I love that you guys made major changes to right the ship. Actions speak louder than words! :-)

  17. Can’t help but wonder how many amazing views you’ll get to take in when you’re not stuck working for years to pay for the one that came with that house.

    Agree 110% with everything in this post. Especially “Millionaire Next Door” reference. That book does a great job of pointing out all of the extras beyond mortgage, taxes and upkeep costs that go into keeping up w/ the Jones when you buy up.

    • Well when you put it that way… YEAH, we’re going to get way more good views not working! Wohoo. And I reference MND at least once a week to friends and family — it has so much good stuff to teach all of us!

  18. On point! We’ve purchased three homes (which we still own) and I think we’d both agree that they’re all bigger than they need to be. Our current one is the biggest, but we also have three kids and my aunt who is basically a live-in nanny. So we actually do use all 5 bedrooms, just not sure the media room and office AND large game room are necessary hahaha, but you know they say everything is bigger in TX. It was really a great price compared to home prices in other parts of the country and we really love our house, so it’s worth it for the few years we’ll end up living here. Although like you, they were always very well under what the bank would’ve approved us for. It’s always interesting to me how so many people actually base their budget on this value and get the most expensive house they possibly can that they can afford the monthly payments on. It’s no wonder so many live paycheck to paycheck. The keeping up with the joneses absolutely kills me.
    Our next move with the military will be the first one with our mega fire aspirations, so it’ll be very interesting to see how things will differ. Could be as early as this fall…we’ll find out soon!

    • Our house is definitely bigger than we need, so no judgment there! ;-) What matters is that you spent less than the banks would have had you buy! Can’t wait to find out where you get stationed and what kind of home you end up buying!

      • I still remember when we were buying our first house in early 2006. I was a new second lieutenant and our household income was about $47k/yr. We were approved for something crazy like $300k. I nearly had a heart attack! Needless to say, we stayed well under that limit.

  19. This. Is. Amazing. So much of what has been swirling in my head when we almost got caught into buying a house way too early this summer. Going hand in hand with the “Don’t Let The Banks Set Your Budget,” is the “Don’t Get Caught In The Real Estate Hype.” I could not even begin to tell you how much pressure was given from many sources on the historical low interest rates. Yes, true that a low interest rate will save you thousands & thousands of dollars over the life of the mortgage. But when people get swept into just one aspect of the home buying process, they neglect/forget the other factors – What’s the size of your down payment? Do you have money set aside for maintenance? Are you prepared for the insurance & tax portion? Will you have to pay PMI and if so when can you refinance? What’s the HOA fees in addition? To me, I would much rather have a great deal of these action items figured out, before just jumping into a home I didn’t quite want because of the “hot hot interest rates.” We’re working hard, and hopefully with our situation now we will have the freedom of choices of a home we love (within in our price range, not the bank!) and interest rates still in the rather low range!

    • I believe you on the pressure! It’s legit. And such a good addition: don’t get caught up in the hype! I’m so stoked for you guys that you didn’t buy, and are being so smart about all of it. High five! :-) And yeah, sure doesn’t seem like interest rates are going up anytime soon, so I think you’re plenty safe waiting!

  20. I’m all about living in a starter home – wrote about it on my blog :)

    There’s just so much more that I want to do with our money than pay mortgage payments forever because of society’s idea that we HAVE to move into a bigger house as we grow in our careers. Our house might not be that big, but it allows us the freedom to invest more of our money towards the future and go on more vacations.

    Although, my wife does want an extra bathroom ;) Maybe one of these days we’ll expand the house for that…

    • What a perfect way to put it: there’s more we’d all rather do with our money than pay a mortgage forever! Like you, we’d rather spend our money on the future and travel!

  21. Very sound advice here. I spent over twenty-five years working in various aspects of the housing industry and I wish more people would have the common sense not to listen to a banker/mortgage broker/Realtor about what they can afford. Most folks don’t understand the system and what it means to work on commission. Opting to use buying logic versus emotion always pays off big time.

    • Thanks for weighing in as someone who’s been on that side of the process! We’re thankful that we’ve never had an actual realtor try to tell us to buy more (though we did have one once who tried to tell us that our half million dollar budget was “extremely small” — so insulting!). And so true — it’s important not to get attached emotionally to houses you see, and instead stay rational! :-)

  22. I live in Vancouver so, to be honest, I have no real intention to ever buy a house for myself if I stay here. That being said, I do plan on purchasing one day, but as an investment property to rent out, not to live in.
    I live with my mom currently, and with 3 of us in a full sized home and a basement…it drives me a little crazy. It’s so. much. space, for no reason.
    So I’m working on bringing her around to selling in a couple years to retire early(ish) and downsizing to travel and actually live. She’s still pretty set on not downsizing, but moving to a more rural area instead where houses are cheaper.
    Baby steps right.

    • We always love hearing different people’s very different takes on this subject, so thanks for sharing your perspective! I think some people are genuinely happier with more space, and there’s no problem with that inherently, so long as they can afford it. Sounds like your mom falls in that camp. We certainly know people who don’t want to travel most of the time, and are genuinely happiest at home. We fall somewhere in the middle — we want to travel a lot, but we still want a comfortable home base. It will be cool to see what you end up doing when you choose your own home — then you can decide exactly what’s right for you. :-)

  23. Totally agree on buying a house within your own financial boundaries (not the banks or the finanical recommended). We’ve always bought with one salary as our base plan. I never really thought of the savings power. We did it for the “just in case” – just in case one of us gets let go in downsizing (never happened), just in case we have kids and someone needs to be the at-home parent (didn’t happen either). I guess the savings were by default! We also drive our cars till they are almost dead (120,000 on my current Subaru and counting), while our friends seem to have a new car every 2-4 years.

    As we are looking towards what is the right home for our next life stage, we are “right sizing”. We decided more kitchen/ more garage/ less bedrooms is really what we need. My current kitchen has 5 feet of counter space total, split into 4 areas. I haven’t cooked in years because I hate it (we moved here for family reasons). And no, we cannot expand it without significant cost. I am insisting we buy below what we have in current equity (price to include any big-tickets we might need to “fix” like new roof or windows), even though technically we can “afford” much more. We are having fun looking and have also defined some location requirements (ex. walkable neighborhood). We do believe we will find something right for us, and within our price guidelines, not someone else’s.

    • Your approach sounds just like ours! Buy a home based on one salary, drive cars into the ground. :-) And what you’re seeking in a new home seems super reasonable. I think it’s completely fair to want more than four awkward little strips of counter space in your kitchen!

  24. Great post. I made the mistake early in my career when buying my first house. My budget was basically whatever the bank said I could borrow. One failed relationship later, the house was sold. When I recovered financially, I set out to buy another house. Trying to position myself as an eligible buyer, I received a pre-approval letter from the bank for $XXX (I don’t recall the exact amount) which was more than I wanted to spend. When I met with a real estate agent and builder, they were trying to coax me into spending the full amount. When I said, “No,” they seem dumbfounded! Of course, they thought, you should spend whatever the bank said you can. Needless to say I found another agent and builder! I never regretted the decision to stick to MY BUDGET, not the bank’s opinion.


    • Good for you for sticking to your guns and finding a new realtor and builder! That pressure is crazy, and while I understand that it’s in their best interest to get you to spend more, you would think that they would feel some culpability in the 2008 housing crisis and reform their ways!

  25. While I love our house and the area this is something I wish we’d paid more attention to when we were looking/purchasing a home. I think it’s often overlooked at the true all in cost of owning a home and most people just consider the mortgage payment. In Texas our property taxes are quite high since there isn’t a state income tax and for our home it works out to about 60% of our mortgage payment extra each month to save for them.

    We spent a little bit more than I’d have liked but luckily we didn’t come anywhere near the $750k our mortgage broker said we were approved for. It was one of the concessions I had to make to keep the wife happy. Especially since I’m gone from home and she feels safe in the neighborhood. With all of the issues in our personal life over the last 1.5 years I wouldn’t trade our neighborhood/neighbors for lower payments though.

    • Whoa — that’s a huge property tax payment. I had no idea they could be so high! And sometimes it’s worth it to spend more than the minimum on a house… even though we bought way less than the banks would have let us spend (like you!), we still bought more house than we *need* by any definition. But we love our house, we know we got a good deal and bought at basically the best time we could have, and so we can live with the fact that we technically could have bought a smaller house. It sounds like you make a good choice given all your circumstances. :-)

      • Yeah a mortgage payment of around $900 per month and property taxes around $560. That hurts but I think it’s probably a wash since we don’t have a state income tax. I’d be curious to find out what say a $100k salary looks like in the states with income taxes, income taxes & property taxes, and property taxes alone. Granted housing costs still vary significantly because a $200k house in Texas is likely a mansion compared to a $200k house in California or New York. There’s talk around the state of doing something about property taxes and how high they are but I don’t know if anything will ever get done and it likely won’t be done soon since Texas is highly dependent on energy which isn’t doing so well right now.

      • Wow, that’s crazy. But I guess if you don’t pay any income tax, it may even out. We for sure pay a lot more than that per month in income tax to our state! :-) But at least in our case, once we retire the income tax will mostly go away, and the tax that remains on our home will be small relatively speaking. But yeah, we also have higher home prices in our area (resort town), so we pay the price in other ways.

  26. I am struggling with this very problem right now. Basic 2BR homes are going for anywhere between 25k and 50k over my budget – even in the neighborhood directly north of where I WANT to live. I just looked at a small house that would be perfect for me…if the street had sidewalks, or the house next door didn’t loom over it…or the neighbor’s driveway wasn’t up against the side of the house. It’s not in the best neighborhood, and I’d be okay with that…I’m afraid I’m caught in that trap of wanting a house that projects my idea of myself out to the world…but that idea is modest and even modest is pricey right now. What I want and what is money smart are two different things at the moment and it is so frustrating. This post definitely gave me another way to think about it.

    • Hi Amanda. We have definitely been there! And we’ve also house hunted to know that there’s no such thing as a perfect house… unless you’re willing to way overpay, and maybe not even then. Ultimately you have to decide what you can or can’t live with, and choose accordingly. But we’ve never heard anyone saying they regret spending less than they were approved for, though we’ve often heard people lament buying the max! I know it’s been a long house hunting process for you — I hope you find your home soon!

  27. Here here. That’s why we were mortgage-free in our thirties.

    Nothing feels better than owning your dwelling outright. Even though we could afford to pay cash for a larger home, we’re still in the same home and quite happy. If anything, we would downsize as opposed to increase our square footage because each additional square foot costs us in freedom/investments of a different sort.

    Quick calculation/gut check: if you can’t make a 15-year mortgage work, it’s too much house.

    • We look forward to knowing what that feels like to be mortgage free… just under two years to go, maybe less! And same as you, we could for sure afford to go bigger, but we’d rather go smaller, even though we bought a house that we will have paid off six years after taking out the 15-year mortgage.

  28. I am so jealous of your skiing conditions! The one day this year where we had decent snow and I wasn’t working (MKL Day) I ended up doing property management stuff. I was completely bummed about missing the best powder day so far for the year but at the same time grateful that these properties will one day provide part of the income to allow us financial freedom to ski or play almost any day we want.

    I am glad you discussed not letting the bank decide how much you can afford. I have always said I would be a horrible mortgage lender as I would be inclined to tell people that although the numbers may say you can afford “X” amount, you really should only spend “Y” amount. When my husband bought his first house he was approved for what he thought was an obscene mortgage amount and I am so thankful that he was smart enough to realize that. The house was the perfect first home for us and after making extra payments to the mortgage we were able to sell it to purchase our current home, a duplex, where the rent covers our mortgage. I am so thankful that these good decisions have aligned well with our current financial independence goals.

    • Well… the last two Sundays I’ve skipped out on powder days to catch up on work. So don’t feel too jealous. :-) And yeah, I’d be the same way as a mortgage lender. “You want to borrow *how much*?! Even though you can ‘afford’ that, do you realize all the better things you could be doing with your money?!” But sounds like you guys have worked out a great home/financial situation — way to go!

  29. Excellent article! My husband has been reiterating this all along, and I finally got it three years ago. Hence why I’m still living in my ‘starter’ home before I had my kids.

    • That’s great! None of us would even see starter homes as “starter homes” if it weren’t for successful marketing by realtors and home builders. :-)

  30. Such great advice, and thoroughly written from many different angles of the issue. Even if you initially buy using the traditional model, you can still make it work if, as you suggest, you just stay put and earn more money. Fixing your housing costs at the price of houses 10 years ago (or longer), and eventually paying only taxes, is a winning formula for FI any way you cut it. But of course doing what you did and buying less than you can afford is the far better move!

    • Thanks, Mortimer! We completely agree — it’s always possible to make a good decision in a given situation, even if you miss the chance to make the ideal situation. We feel thankful every day that we didn’t overbuy when we had the chance to! :-)

  31. Love this article! This is exactly everything I have been saying to my husband. We purchased our home in January 2007 for $272,000. After putting over $35,000 worth of updates into the home, it is only worth about $235,000. Once we had our principle down enough, we attempted to sell our home just this last December 2016. While we received a ton of offers, we have been unable to find a suitable home to move into, due to a serious lack of inventory on the market. Because we will walk away from the sale of our house with barely any proceeds to use as a down payment, we can’t afford to purchase a fixer-upper. After shopping around, I have a greater appreciation for our 1,700 square foot home, with three bedrooms, 1.5 baths, no basement. This sounds shocking to people, that we would consider staying in a home this size, with two boys (age 2 and 4). But I LOVE our home. It’s an open layout, large living spaces, and a fenced in backyard to die for. We have essentially sold our home back to ourselves, and have decided to take it off the market. And by staying in our once starter, now forever home, we will have the mortgage paid off by the time the boys head to college! And we won’t pay closing costs, higher taxes, etc. It feels like we just won the lottery!

    • What a great ending to your story! It would be easy to feel better about having gone upside down on your home, but in the end you came away with more appreciation for it. Love that!

  32. This is so relevant to us right now! We are planning to move to a less expensive area (a couple of states away!) so we’re trying to figure out the best plan for proper alignment of the stars, etc. While it’s so easy to say we want our dream home NOW and the banks would surely tell us we can afford it, we’re quickly growing to realize it’s not feasible to have that AND early retirement. It’s been a bit of a wake-up call to us to figure out we can’t have everything immediately and that maybe it’s not such a bad thing to have to delay the Ultimate Dream Home til we can *truly* afford it.
    We live in a “starter” home now but we’re now fully prepared to start over again in our new location. If we’re not inflating our lifestyle, we probably don’t need to inflate our house! And if we can manage to sell our HCOL townhouse and pay off our potential “retirement home”, well that’s just the cherry on the sundae!
    Plus, what good is a $200k view if you can just GO OUTSIDE and find your own? ;)

    • Good luck with your big move! I think a good question to ask yourself is whether your “dream home” is defined by you guys, or defined by what society tells you you’re supposed to want. If you’re doing just fine in a starter home, maybe your actual dream house fulfills the dream just by being in your dream location, not by being any bigger or nicer. ;-)

      • Oh, our dream home is definitely defined by us! It’s everything society tells us we *shouldn’t* want — a smaller home on a larger lot, super green/energy neutral. Exactly the opposite of everything that gets slapped up around us in our suburban sea of cookie-cutter townhouses! But we recognize the cost of building our own home from the ground up is probably a little hard to attain at the beginning of ER –we’ll have to give that nest egg a few more years to grow!