It may go down as one of my favorite commercials of all times: Back in 2004, Geico produced a spot called “Tiny House” that lampooned the slimy reality TV programming that was just beginning to boom in popularity. It’s hilarious, and dead-on . In case you don’t remember, here it is:
The main target of this commercial was the voyeuristic entertainment trend that was sweeping popular culture. But while these ad creators did a good job of mocking that, they also touched on a hidden nerve — America’s fear of small houses.
Living in a house that’s too small is something that many of us find utterly repulsive. And while the dwarf-sized home featured in the commercial is obviously a farce, far too many Americans face the idea of living in a modest adult-sized home with an equal amount of dread. But that dread is unfounded. Over the course of your lifetime, living in a modest home could be one of the best financial decisions you ever make.
In this series, we’ve been dealing with the implications of home ownership and mortgage as it relates to debt and financial wisdom. Last time, we made a case for why your big house might be killing you financially. When we stretch ourselves too thin to get into a big house in a status neighborhood, we create dangerous holes in our financial life, handicapping our ability to save, invest and give. It’s a pretty compelling argument against the cult of the big home.
I realize, though, that this one argument may not be enough to sway you. The home obsession in our culture runs deep, and it’s easy to ignore the counter-culture warnings of a lone blogger. So in addition to warning you about the dangers of buying a home that’s too big with a mortgage that you can’t afford, I’d like to present some benefits that come along with living in a modest home. Maybe these will help you to think a little bit differently.
1) Easy cleanup and affordable maintenance
The bigger your house is, the more work it takes to keep up with it. Laura and I can clean our small home in a couple of hours; in a modern McMansion, that same task can take a couple of days. Unless you’re willing to hire maid service to do your cleaning, you’ll spend a lot of time trying to keep your big home spic and span.
What’s true of cleaning is also true of maintenance. The first law of owning a home is that things always go wrong: Stuff breaks, parts wear out, and unexpected events necessitate quick repairs. The bigger your home is, and the more systems it has, the more stuff there is that’s just waiting to fall apart on you. You’ll spend a lot more money maintaining a big home than you will a smaller place.
2) Cheaper utilities
We don’t often think about the cost of our utilities when we are considering the cost of a home, but we absolutely should. The important thing about home buying is not the purchase price, but the cost of ownership. A big, expensive house becomes even more expensive when you think about how much it will cost to heat it, cool it and light it up over time. The bigger your house is, the bigger your utility bills will be. Living in a more modest home can save you a substantial amount in utility bills each year.
3) Cheaper taxes and insurance
When you shop for a mortgage for your home, the mortgage broker is going to tell you how much your monthly payments would be for each different mortgage option that he gives you. What he probably won’t be able to tell you, though, is how much more you’ll have to pay for your real estate tax and homeowner’s insurance. These two expenses are collected each month on top of your mortgage payment, and they’re both determined according to the value of your home.
Taxes and insurance can easily ad up to 10-15% of your cost of ownership every month. If you live in a big, expensive house, it’s going to cost you a lot to insure it, and that will drive up your monthly insurance premiums. The same thing is true of taxes — if the government thinks that your house is valuable, they’re going to charge a premium tax rate on your property. Living in a modest house decreases the amount of money that you spend on these necessary evils, allowing you to devote those funds to more worthy causes.
4) Better market flexibility
No matter where you live, chances are that you won’t stay in that house forever — you’ll either move somewhere else or age out of the home. That means that someday you’ll want to sell the house, or rent it out to someone else. When that day comes, a medium-sized house can give you much more flexibility.
In this current economic crisis, the people who have been burned on home values have largely been the people living in big, overpriced houses. Why? Because in tough times there is less demand for those houses, and so their values fall. In modest and medium sized homes, though, prices are more stable, because the market is more constant. It’s much easier to sell or rent a small home than it is a large one, which means you have the flexibility to make big life moves according to your needs, not the whims of the national economy.
5) Smaller payments and quicker payoffs
Okay, so this isn’t exactly a new idea (we’ve covered it here and here) — but it’s still the most compelling reason to live in a modest home. If you don’t have a big home, you don’t have to use a big mortgage to finance your purchase. Small mortgages mean small monthly payments, which allow you to spread your income out to other areas of your financial life.
Small home mortgages also give you the flexibility to borrow on 15 year terms instead of 30 year terms. Doing so will save you tens of thousands of dollars in interest over the life of the loan. And you’ll own the house free and clear 15 years sooner than you would if you took out a big, 30-year mortgage. Once you have no more mortgage payments, what will you do with all that extra money each month? I’m sure you can find something.
I hope that you’ll take some time and consider these reasons for living in affordable houses. I’m not asking you to make decisions that will be detrimental to your family. What I am saying, though, is that a big, pretty house may not be in your family’s best interest in the long term.
Think about it, do some math, and see where the numbers take you.
Photo by benjgibbs. Used under Creative Commons License.