How Much House Should You Afford?

Making financial decisions is part of life. So is dealing with the consequences of those decisions, whether positive or negative. Let's talk about the decision to buy a home, and what the positive or negative consequences of that might be.

Home ownership is one of the symbols of adulthood and independence we all strive for. Ironically, a home usually represents and is the epitome of our lack of independence. Why? Because it's not our house at all.

It belongs to the bank until we pay it off. Most conventional loans have a term of 30 years, but most people won't pay their home off that quickly, as crazy as that sounds.

I read a statistic that the lifespan of the average mortgage is seven years. That means that most people are either refinancing their home or selling their home every seven years. This cycle makes it pretty unlikely that people will ever actually own their home.

Some people view that as a good thing, others as the worst fact of American personal finance. Those that love mortgages have their reasons, and so do those that hate them.

People who are in favor of never paying off a home usually cite one big reason - taxes. 100% of mortgage interest is tax deductible, so proponents of this philosophy say not only should you never pay off your home, you should make it an interest only loan so your tax benefits are maximized. This is a worst-case scenario for mortgage haters.

Proponents of paying off your home as quickly as possible will say that the tax advantages never outweigh the financial and emotional stress associated with paying a mortgage every month for the rest of your life. They talk about how leveraging your home can work in theory, but how most people don't have the discipline or the foresight to actually pull it off. 90% of people out there who never pay their house off on purpose will end up with neither their home paid off, nor their retirement set.

In other words, thirty years from now they won't be any better off financially thanks to their home leveraging strategy. The truth is they'll be a lot worse off because they'll still have debt, and their income won't be secure, and worst of all they will have lost their most valuable asset - time.

So why are so many people fooled into the 'leverage your home to wealth' plan? It's simple - the plan justifies them in their current over-spending, instant gratification lifestyle.

Telling people to leverage their home to wealth is (in most cases) the financial equivalent of going to a fat person and telling them that ice cream sandwiches are the solution to their weight problem. Ridiculous? Absolutely.

Personal finance is behavioral much more than it's mathematical. Each of us needs to develop the discipline and knowledge possessed by those that are actually wealthy. The most important attribute of the wealthy people I've talked to point to persistence and willingness to delay gratification as two keys to their success.

Save for a down payment. Buy a smaller house now with the goal of someday setting yourself up to live in the home of your dreams. You'll be glad you paid the price and waited.