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Housing is a major expense for many people. According to surveys by the U.S. Bureau of Labor Statistics, homeowners spend 30-35% of pre-tax income on housing. That figure includes the mortgage, property taxes, and maintenance.
Some folks may be able to readily afford a 30% housing expense and have plenty available to save, invest, and spend however they please. But it's easy to become house poor, especially if a hoped-for raise never materializes (the one that would have reduced the percentage of income dedicated to housing) or expenses in adulthood outstrip original presumptions.
A moderate to massive reduction in annual housing expense (or more efficient use of housing dollars from the start) could benefit long-term wealth.
For example, if I earned $100,000 annually and spent 20% of your income on my home rather than 30%, then I'd have $10,000 extra for other purposes. If I invested $10,000 each year for 30 years and earned 5% each year, then I'd accumulate over $650,000; get a growth rate of 10% and have more than $1.5 million. (Note that these are hypothetical growth rates for illustration purposes only).
If this approach sounds appealing, what are ways to pay less in housing (and related expenses) and have more for investing? Here are a few things I've done (or observed others doing) in order to buy a house that is affordable:
1. Figure out how much I can afford.
Mortgage lenders may let me borrow more money than I should. They're worried only about whether I can pay back the loan whereas I should be concerned about whether I can make a monthly mortgage payment and manage other financial priorities.
So, for starters, I've decided not to let the mortgage broker or the size of the mortgage for which I'll qualify dictate what I can truly afford. Instead, calculate how much I can afford and let that number drive my decisions. For example, if I'd like to keep my monthly mortgage payment (including property taxes and insurance) to $1,000, then My calcs might look like this:
- Annual Mortgage Payment (Goal) = $12,000
- Property Taxes = $1,200 (or $100 per month)
- Homeowners Insurance = $1,200 (or $100 per month)
- Amount Available for Mortgage Debt (Principal and Interest): $9,600 per year
- Mortgage Interest Rate = 4%
- Number of Years on the Mortgage = 30
- Present Value of Loan Amount = PV(4%, 30, -9600, 0, 0) = $166,000
- Add Down payment to PV to Determine Home Sales Price
For our family, our budget allowed us to make house payments; service other debt (car loans, student loans, etc.); save for retirement, college, and home maintenance; pay for food, utilities, and clothes; and set aside money for leisure such as hiking vacations and road bikes.
2. Take my time when choosing a home.
I'm more patient that I used to be but typically when I'm ready to move into a new home as soon as I decide I'm ready to buy a house. I may easily find the perfect house but it may or may not be affordable. And if it's affordable, it may or may not be one suitable for me.
Finding the right place to live can take several months. I may need to narrow your search to a handful of areas and then wait for a house within my price range to become available. That may sound tedious but if I take my time, I'm more likely to know when I've landed on the right property.
That's not to say that I should drag a realtor to hundreds of homes in hopes of finding the perfect one after a zillion walkthroughs. Rather, after getting to know the area and taking a few outings, I should be able to pinpoint what's ideal for me and my budget — and then I'm ready to view a property and make a decision fairly quickly when the right opportunity surfaces.
3. Consider costs associated with living in the home.
When thinking about home affordability, consider as many expenses as possible that relate to the condition, upkeep, safety, and location of the home.
For starters, calculate the monthly payment on the home. I'll need the loan amount (which is typically the sales price less your down payment), interest rate, and number of years on the loan. Go to Excel or Google Sheets, and calculate the payment according to this formula: =PMT(Interest_Rate, Number_of_Periods, Present_Value, Future_Value). In this situation, Present_Value is the mortgage loan amount or the amount to borrow; and Future_Value is zero as I'll want the principal balance to be zero when I finish paying the loan.
In addition, I'll consider these costs (some of which may be included in the mortgage payment):
- property taxes: generally, the more my house is worth, the higher my taxes; however, taxes and the way properties are valued vary among municipalities so check specifics
- transportation: the closer my house is to my workplace, restaurants, shops, schools, and/or public transportation, the less I'll spend on transportation and the more room I may have in my budget for housing; conversely, the further away, the more I'll likely pay in transportation and less I'll have for housing
- homeowners association (HOA) fees: these fees can pay for common area upkeep that can help protect property values; nevertheless, the fees can be significant and add hundreds of dollars to my monthly expenses
- home maintenance: a smaller home could cost less in upkeep but older, possibly less expensive homes may need more repairs; consider the remaining useful life of appliances, HVAC system, roof, and materials when evaluating housing costs
- homeowners insurance: generally, I'll pay more to insure a house with a higher value; however, it makes sense to get quotes on insurance to know what I'll be paying in premiums
Not only can a more expensive house possibly cost more in principal and interest payments, but also more in taxes, fees, insurance, and maintenance. However, to get a full picture of costs, consider how a more expensive home accessible to employers, businesses, restaurants, and shopping might allow money saving in other areas.
4. Think about the school situation.
Before shopping, I really didn't think about neighborhoods based on the proximity of schools. However, I was fortunate to land in a great school district. As a result, we were able to send our kids to a great public school, which saved on private school tuition of about $25,000 annually per child.
If I went through this process again, I'd consider digging deep into the school assignment process, as a nearby school may or may not be the one to which my child is assigned. For example, I may be able to send my child to an excellent charter school that draws students from many neighborhoods. Finally, I'd realize that I have to live in the most fashionable neighborhood for my children to attend a good school; many great schools serve families who live in moderately priced neighborhoods.
Investigate schools to learn how the choice of location may impact children's education and potential costs associated with schooling.
5. Consider how my home can help me control costs.
The right house can help me control costs. I've mentioned location as a way of saving on transportation and education expenses. But I may also be able to save in other ways.
I may buy a home that has space for a home office, saving on rent. I might buy a house with a large backyard or extra acreage where I can grow vegetables and fruits, saving on my grocery bill. Finally, and I introduce this topic because I was once shown a house with a mini-kitchen, I could confirm that I'll have the space to prepare meals and store supplies, allowing me to save money on dining out.
6. Think about how I could make money with my space (and whether I will).
I've never leveraged my home to make money but I've spoken with people who have. Ways to make extra cash with a properly situated and appointed home:
- Rent a room on an ongoing basis
- Rent a private room or the entire house on Airbnb
- Rent the entire house during times of high demand in your area (such as during annual sporting events or business shows)
- Grow and sell vegetables, fruit, and flowers in my yard (or on my land)
- Host classes on cooking, gardening, art, etc.
I add this section to illustrate that buying a larger home, a property with acreage, or a home in a pricier area could reap monetary benefits.
Consider being strategic in the choice of home and realistic about how I can use square footage and acreage to generate cash.
I haven't had to spend big to get a nice (though not luxurious) home. This approach can involve developing a budget (rather than letting someone else tell me what I can or can't afford), take the time to locate the right house, consider the costs of a home and cost-savings associated with the property, think about ways (besides selling) that I might use my house to generate revenue. When I put everything together and buy an affordable home, I may have extra cash available to spend and invest.