Is there a long-term disadvantage to buying a small home?

Question

I am shopping for a first home. Based on income, and estimates of the monthly mortgage, tax, and insurance payments, I can afford a house that is $180,000 with 30 years. But in my area, such as house is huge, and has unnecessary rooms.

Since I don't need such a large home, and don't see any change to that need, a $60,000 home is sufficient, at 1/3 the cost.

I can see several advantages to buying a smaller home, where payments will be minimal. Thinking long-term, though, is there any wisdom suggesting it is wiser to pick the house I can afford, instead of one below my ability? In the long run, is there some likely problems that would cause me to regret not buying a larger house?

Answer 1

Depends on what you mean by smaller. Generally, the number of bedrooms and bathrooms will be the first thing people will look at when buying a home. Smaller square footage can be helped by the layout/design of the house. The disadvantages of buying a home with few bedrooms and bathrooms is that you won't able to sell to families (also, if your household changes, you have to move up anyways). Depending on your local job market wage growth, your starter home may not appreciate because generally the people who are interested in a small starter home are people who can't really afford to pay more and wages haven't increased for them to afford more.

Answer 2

The obvious disadvantage is that if you buy a house (or anything else, FTM) that is close to the maximum you can afford, if your situation changes for the worse (which it can: I've had it happen to me a couple of times) then you will no longer be able to afford it, and risk either losing it to foreclosure, or having to do a forced sale, perhaps at a loss.

Another advantage to the smaller house is that (assuming it's in a good neighborhood &c), it will be easier to sell than a more expensive one, if you ever decide to do so.

And finally, you can invest the money you are not spending on the expensive house in e.g. mutual funds, thus diversifying your investments and having a pool of capital that you can call on if needed, rather than being "house poor".

Answer 3

I can think of two disadvantages to a smaller house.

The first is your future needs:

• will you need more room for a spouse or children in the future?
• will you need the space to take in a lodger if money becomes tight?

If the answer to either of these is "yes" then a larger house might be better, because buying / selling costs money (fees, taxes etc.) aside from the actual property cost.

The second is the investment potential. If you buy a smaller house for £X, and the market rises by 10%, you will have made less money on it than if you had bought a larger house for £2X (0.1X versus 0.2X respectively). However, you would only realise that gain if you sold, and of course the flip side of this potential gain is that you also have more to potentially lose with a larger house if the market went down.

Note, this answer is intended to specifically address the question "What are the disadvantages of buying a smaller house than the most you could afford". It should not be taken as implying that these disadvantages mean you should buy the larger house.