Americans like big stuff… big cars, big houses, Big Gulps.
I get the appeal, certainly when it comes to big houses. You get to have a guest room, a media room, an art room, his and hers offices, and on and on. I am in the process of building a new house myself, and it’s going to be big.
If you can afford a big, expensive house, good for you. By all means, you should enjoy it. Just keep in mind…
An expensive house translates into an expensive life.
When you move into an expensive house, you want to fill it with expensive stuff. You buy an expensive car and park it in your expensive driveway, next to your expensive yard tended by your expensive gardener.
Since you’re driving a slick car now, you want to look good in it. So, you start buying more expensive clothes. Then you start socializing with your new neighbors, who have expensive hobbies. Pretty quickly, you acquire those expensive hobbies, too.
What happens when the money stops rolling in? Sure, you can quickly eliminate small discretionary expenses like lunches out. But it’s not that easy to downsize to a smaller house in a cheaper neighborhood. It’s not that easy to sell your expensive furniture and your expensive car. This stuff takes time, assuming you can do it at all.
Even then, you’re going to lose money in the process. Especially if you need to sell quickly, because you will be willing to accept a lower sale price for all of this stuff.
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You are much better off buying a cheaper house from the start.
In a perfect world, you would pay cash for a house—that’s the house you can really afford. But I know that is not realistic for most people. So, when you buy a house, think about buying one you can pay off in 10 years or less. That is ambitious, I know. But dragging it out is expensive. The longer you take, the more you will pay in interest.
You should also consider using a little-known tool for quickly repaying your mortgage called “recasting.” Here’s how it works…
Say you have an ordinary, 30-year fixed-rate mortgage. You can prepay the mortgage by sending in additional principal. When you do that, you shorten the length of your mortgage. So instead of a 30-year mortgage, you have a 29-year mortgage, or a 28-year mortgage, etc. The more additional principal you pay, the shorter your mortgage gets, until you finally pay it off.
When you recast your mortgage, you send in additional principal, just like you did in the first scenario. But this time, it’s a large lump sum. The bank might require anywhere from $5,000 to $20,000—at minimum.
In this case, the length of your mortgage stays the same, but your monthly payments go down. In other words, you still have a 30-year mortgage, but with lower payments.
When you recast, you pay less interest overall, which is good. But you’re also freeing up cash flow, which you can put to work. For example, say you recast and your monthly payment drops from $3,400 to $2,600. You’ve just freed up $800 a month. Now, instead of spending $800 on this or that, you could send it in as additional principal. That’s where the magic really starts.
It’s certainly worth recasting once, maybe even twice. After that, just keeping paying your new lower mortgage, plus additional principal. That’s how you pay off a mortgage really, really fast.
Spending too much on a house will blow up your financial life.
As I always say, your financial health comes down to a few big things: house, car, student loans. Getting these things right is what drives your ability to save and invest. So, if you’re in the market for a house, get the cheaper one.
Jared Dillian
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Buy the Cheaper House