Many people max out their housing budget, purchasing as much house as the bank will allow. There may be a benefit to buying a home that’s priced under what you can actually afford, even if it means buying a slightly smaller house than you initially intended.
You’ll have a lower down payment.
Mortgage down payments can be up to 20% of the home purchase price. Buying less house than you can afford means you don’t have to put down as much as you would if you’d maxed out your home buying budget. For example, you’d make a down payment of up to $40,000 on a $200,000 home versus $30,000 down on a $150,000 home. You can use the savings to pay closing costs, upgrade the home before moving in, or you can save it for a rainy day.
You’ll have a lower mortgage payment.
The more you pay for a home, the higher your monthly mortgage payment will be. For example, you might be able to comfortably afford a $1,500 mortgage payment, but buying below what you can afford and purchasing a home with a $1,200 mortgage gives you more wiggle room in your budget.
Insurance and taxes will be lower.
Both home insurance and property taxes are based on the value of your home. Not does buying a less expensive home allow you to have a lower monthly mortgage payment, it also lowers your home insurance and property taxes. This lowers the overall cost of homeownership.
You’ll have more flexibility in your budget.
If you max out your budget with your home purchase, you can’t really afford for things to go wrong. Any slight change in your financial situation can make it difficult to meet your mortgage and other monthly obligations. With a lower mortgage payment, you can tolerate a slight increase in expenses or decrease in income without it creating a complete financial disaster.
You can pay your mortgage off sooner.
You may be able to pay your mortgage off in 10 or 15 years instead of the typical 30 years. Even if you don’t choose a shorter mortgage, you might opt for the 30-year mortgage, but double up on payments during the months you can afford to. Any amount of time you shave off your mortgage will save you money on interest and put you closer to full home ownership.
Don’t think you have to purchase a home for the full amount the lender is willing to approve you for. If you want to leave some room in your budget or pay off your mortgage sooner, buying a home that’s below your means may be more beneficial.