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A house is the biggest purchase you will ever make.
But people royally screw it up.
They don't THINK for themselves.
They buy WAY MORE house than they NEED.
It's a very EXPENSIVE mistake.
Here's why:
||| THREAD |||
But people royally screw it up.
They don't THINK for themselves.
They buy WAY MORE house than they NEED.
It's a very EXPENSIVE mistake.
Here's why:
||| THREAD |||
1. Ditch The Status Symbol
People are certain houses depict status;
Blinded by the lingering "American (& Canadian) Dream" ideal & encouraged by
- Family
- Friends
- Lenders
- Marketing
to buy as MUCH as they can under the guise of having "made it".
This is stupid.
(con't)
People are certain houses depict status;
Blinded by the lingering "American (& Canadian) Dream" ideal & encouraged by
- Family
- Friends
- Lenders
- Marketing
to buy as MUCH as they can under the guise of having "made it".
This is stupid.
(con't)
They fail:
- to realize that a large house + large mortgage = little equity.
- to account for ongoing carrying costs such as taxes, maintenance, utilities.
They are:
- Encouraging debt
- Tying up cash flow
- Paying more interest
- Incurring extra costs
But how much exactly?
- to realize that a large house + large mortgage = little equity.
- to account for ongoing carrying costs such as taxes, maintenance, utilities.
They are:
- Encouraging debt
- Tying up cash flow
- Paying more interest
- Incurring extra costs
But how much exactly?
2. Scenarios
For this exercise, let's use a similar example from a previous thread.
Houses valued at:
$270,000
$400,000
$700,000
3.49% interest rate.
$205,000 down payment.
But now, a 25-Year mortgage.
Let's go.
For this exercise, let's use a similar example from a previous thread.
Houses valued at:
$270,000
$400,000
$700,000
3.49% interest rate.
$205,000 down payment.
But now, a 25-Year mortgage.
Let's go.
3. The Debt
$270,000 house = $65k mortgage
$400,000 house = $195k mortgage
$700,000 house = $495k mortgage
Compare the $270k vs. $700k house:
The $700k house is 2.59x more expensive.
Its mortgage is 7.62x larger.
And will take FAR longer to pay off.
Pro-tip: Limit debt
$270,000 house = $65k mortgage
$400,000 house = $195k mortgage
$700,000 house = $495k mortgage
Compare the $270k vs. $700k house:
The $700k house is 2.59x more expensive.
Its mortgage is 7.62x larger.
And will take FAR longer to pay off.
Pro-tip: Limit debt
4. Cash Flow
Consider financial flexibility.
Monthly Payment - 25-yr mortgage:
$65,000 mtg: $324
$195,000 mtg: $973
$495,000 mtg: $2,469
If this was us, at 25 years, we'd tie up >30% of our net pay on a $700,000 house.
Not good.
(con't)
Consider financial flexibility.
Monthly Payment - 25-yr mortgage:
$65,000 mtg: $324
$195,000 mtg: $973
$495,000 mtg: $2,469
If this was us, at 25 years, we'd tie up >30% of our net pay on a $700,000 house.
Not good.
(con't)
VERY not good if you consider unpredictable events.
Job loss, for instance.
For us, the mortgage on the $270,000 and $400,000 houses would still get paid.
But the mortgage on the $700,000 house - we'd be in negative cashflow.
Consider the unexpected when you're househunting.
Job loss, for instance.
For us, the mortgage on the $270,000 and $400,000 houses would still get paid.
But the mortgage on the $700,000 house - we'd be in negative cashflow.
Consider the unexpected when you're househunting.
5. Other Interests
Total Interest - 25-yr Mortgage:
$65,000 mtg: $32,255
$195,000 mtg: $96,764
$495,000 mtg: $245,633
Remember me saying, 'Limit debt'?
Imagine pissing away $245,000 because you WANTED the status-symbol house.
Yikes.
Total Interest - 25-yr Mortgage:
$65,000 mtg: $32,255
$195,000 mtg: $96,764
$495,000 mtg: $245,633
Remember me saying, 'Limit debt'?
Imagine pissing away $245,000 because you WANTED the status-symbol house.
Yikes.
6. Opportunity Cost
But it's worse. There's an opportunity cost.
You could have invested that money.
The 25-yr opportunity cost for:
Buying at $400,000 instead of $270,000?
$452,000.
Buying at $700,000 instead of $270,000?
$1,500,000.
(7%, comp monthly)
Double yikes.
But it's worse. There's an opportunity cost.
You could have invested that money.
The 25-yr opportunity cost for:
Buying at $400,000 instead of $270,000?
$452,000.
Buying at $700,000 instead of $270,000?
$1,500,000.
(7%, comp monthly)
Double yikes.
7. Maintenance
A house is a real property asset.
It will wear down, meaning it requires regular maintenance.
- Repainting
- Replacing a roof
- Replacing flooring
- Updating the kitchen
- Renovating the basement
will be cheapest for the $270,000 house.
(con't)
A house is a real property asset.
It will wear down, meaning it requires regular maintenance.
- Repainting
- Replacing a roof
- Replacing flooring
- Updating the kitchen
- Renovating the basement
will be cheapest for the $270,000 house.
(con't)
Prime example:
This year, we had a steel roof installed on our ~900-1000 sq ft house.
$10,500 tax-in for 12-square.
A $700,000 house here is two-storey and 4x the floor area.
The same roof on THAT house:
Likely $35,000+.
Not cheap, and often NOT considered when buying.
This year, we had a steel roof installed on our ~900-1000 sq ft house.
$10,500 tax-in for 12-square.
A $700,000 house here is two-storey and 4x the floor area.
The same roof on THAT house:
Likely $35,000+.
Not cheap, and often NOT considered when buying.
8. Commissions
At some point, you may go to sell.
You have to pay commission on the sale.
At 5%:
$270,000 = $13,500 commission.
$400,000 = $20,000 commission.
$700,000 = $35,000 commission.
More expensive to:
- Buy
- Hold
- Maintain
- Finance
- Sell
Go smaller.
At some point, you may go to sell.
You have to pay commission on the sale.
At 5%:
$270,000 = $13,500 commission.
$400,000 = $20,000 commission.
$700,000 = $35,000 commission.
More expensive to:
- Buy
- Hold
- Maintain
- Finance
- Sell
Go smaller.
9. Intangibles
Then there's what you can't put a number to.
The stress-free feeling of not owing a dime to a lender or having them dictate where your money goes each month.
You can't put a value on that.
A bigger house will delay this.
Know 100% what you're getting into.
Then there's what you can't put a number to.
The stress-free feeling of not owing a dime to a lender or having them dictate where your money goes each month.
You can't put a value on that.
A bigger house will delay this.
Know 100% what you're getting into.
10. In Sum.
You're better in a smaller house.
Something befitting your NEEDS over your WANTS.
A smaller house means:
- Less debt
- Greater flexibility
- Less interest
- Cheaper maintenance
- Mortgage-free sooner
- The satisfaction of OWNING the biggest thing you'll ever buy.
You're better in a smaller house.
Something befitting your NEEDS over your WANTS.
A smaller house means:
- Less debt
- Greater flexibility
- Less interest
- Cheaper maintenance
- Mortgage-free sooner
- The satisfaction of OWNING the biggest thing you'll ever buy.
