My wife and I are looking at trading up to a larger house. How do we figure out how much we can afford?
I’m so glad you’re asking this question before you start the open house parade. Good for you.
There are two very different ways to answer this question. The first is the traditional way—the way the lenders and realtors answer it: Based on your down payment, income and expenses, how much can you afford to put to a mortgage each month, and therefore how much can you borrow? Lenders are incented to encourage debt because, provided you don’t default, the more you borrow, the more they make. Realtors have a similar motivation because the more house you buy, the higher the commission.
I’m not knocking lenders and realtors—if that were my business I’m sure I’d do the same. But there is another way to answer the “how much house can I afford” question. This second way is less common and more complicated, but way more valuable:
Based on what you want in life, how much house can you afford comfortably?
In my opinion, you actually can’t really answer the affordability question without thinking holistically. What do you want when it comes to experiences, family, friends, things, career, contribution and retirement? Talk to your wife about these areas and write your answers down because they are critical to your decision about trading up to a larger house.
In the absence of covering off the areas I listed above, you run the risk of committing all your resources to maintaining your new, larger house and not having anything left over for anything else.
I know you’re probably gritting your teeth right now, hissing that I should go read the latest news on housing affordability and then try to talk about hopes and dreams. But my intention is to stop you in your tracks.
When you think about what you want, what will you have to give up to move to a larger house? You may be someone who values your home above all these other things—and if that is the case call the realtor.
But too many of us default to buying bigger and stretching ourselves too thin without thinking it through. For example: Do you want to provide some support to your kids’ for their post-secondary education? If yes, what is the trade-off between that goal and your new larger backyard? Based on what you want in life, how much can you afford comfortably? After considering this question, you may still decide to make a move, but do so understanding the trade-offs. This is especially relevant as you become older and more established in your work. There is always the risk that you will succumb to “lifestyle inflation.” This is the idea that as you make more money, your expenses inflate right alongside your raises and you never actually get further ahead.
In his new book, The Wealthy Barber Returns, David Chilton recommends we use the phrase “I can’t I afford it” much more often. You may want a larger house but based on what you want in life, can you afford it?