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.

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!