A home is usually a household’s largest and most important financial asset. But it’s more than just something you buy and use – it’s actually an intimate component of your family’s DNA. However, this doesn’t give you permission to overspend!
The Problem With Overspending on a House
Every year, millions of Americans purchase homes. A hefty percentage of these individuals spend more than they can reasonably afford. And while the short-term effects may be negligible, the long-term impact is severe.
Overspending on a house increases your monthly expenses, limits your ability to pay down existing debt, reduces your ability to save and invest, postpones important retirement savings, increases stress levels, and promotes anxiety. It also makes you less capable of paying for emergency expenses and giving generously to others.
In other words, overspending on a house is a crippling financial mistake with long-term ramifications. And no matter how appealing a house might be, you have to learn to say no!
6 Ways You Can Stay Within Your Budget
Few people go into the home buying process thinking, “I sure would love to buy more house than I can afford!” No – in most cases they simply don’t know that they’re overspending. Or in some cases, it slowly sneaks up on them.
But whatever the case may be, here are some specific ways you can stay within your budget and avoid overspending on a house:
- Stop Comparing
We live in a comparison culture that’s underscored by chronic overexposure to social media and mass advertising. Unless you turn off your internet and TV, it’s nearly impossible to avoid comparing yourself to your peers. In light of this, you have to be very careful – particularly when buying a house.
The danger is that you start to reflect the lifestyles and spending habits of your closest friends and peers. And if left unchecked, this can lead you to buy a house that you have no business purchasing. The determination of how much house you can afford should be decided based on black and white numbers – financial data that’s specific to your household.
- Create a Concrete Budget
Before you ever visit an open house, tour a home, or consider putting in an offer, take the time to develop a concrete budget. In other words, set your absolute maximum price and make a promise to avoid going over this number under any circumstances. The more specific and detailed you are when developing your budget, the less likely you are to surpass your pre-defined limit when you fall in love with a property.
- Hire the Right Agent
The right agent is not only experienced and skilled, but they should also be honest, transparent, and ethical. Give your budget to your agent and ask them to only show you houses that you can afford. While it’s normal for an agent to show you houses that are just above your top purchase price – to account for negotiations – be wary of working with an agent who shows you properties that are way out of your stated budget.
- Keep Emotions in Check
Emotions aren’t bad in and of themselves, but they have no place in the home buying process. If you let emotions go unchecked, you’ll end up buying a house that you can’t afford. Green Residential recommends:
- Setting firm boundaries
- Having a third party hold you accountable
- Looking at lots of houses
- Listing the pros and cons of each opportunity
- Giving yourself plenty of time
If you do these things, you’ll be much less susceptible to making an emotional purchase.
- Shop Around for Everything
You’re not just buying a house – you’re also obtaining a loan, homeowner’s insurance, and other purchase-related products and services. Make sure you shop around for everything and compare prices from different providers.
- Don’t Forget About Closing Costs
Finally, you have to account for closing costs. They can vary dramatically from one lender to the next, but typically range from 2 percent to 5 percent of the home’s purchase price.
Thus, if you’re purchasing a $250,000 house, expect to pay somewhere between $5,000 and $12,500. (A failure to account for these costs could send your budget into a tailspin.)
Are You Ready?
Buying a house is something that requires both financial preparedness and mental readiness. Before entering into this process, carefully consider whether you’re both financially and mentally ready to buy a house.
Don’t proceed until you’re confident that you can check off both of these boxes.