When you first begin looking for a new home, you probably start by determining a budget of what you can afford, narrowing your search with a maximum price in mind. When you apply for a mortgage, your approved amount is based largely on your income and debts, but doesn’t take into account your unique wants and needs. Unfortunately, many buyers consider their approved budget’s ceiling as a guideline for which home they should purchase, regardless of whether they truly need a home of that size or price.
Larger homes can be a point of pride and may even improve day-to-day life, but they also come with a lot of added costs and responsibilities that are important for buyers to consider. Buyers should also weigh the potential benefits, short- and long-term, of having more room in their budget. That’s why it’s important for informed buyers to keep in mind that bigger isn’t always better—even if you can afford it.
At Jefferson Security Bank, we understand that finding the right home isn’t as simple as finding a home in your budget. Whether you’re considering relocating to West Virginia or Maryland or are a lifelong resident looking to purchase your first home (or find a home that better meets your needs!), this post is for you. We’ll explore the economic and lifestyle benefits of choosing more modest homes over larger ones, and why living below your means and buying a smaller home in West Virginia and its surrounding areas might make more sense for you.
The Financial Benefits of a Smaller Home
It goes without saying that smaller homes are often cheaper, and that spending less money on your home means more money in your pocket. But exactly how much more does it cost you to purchase and live in a bigger home? Let’s take a look at some of the added costs of buying large, and how much you can save by purchasing a more modest home.
The Benefits of the Lower Purchase Price of Smaller Homes
As you are weighing your options for your home purchase, you are likely looking at a home in a range of budgets—not just at the top of your budget. Comparing homes of similar quality, with similar amenities and in similar locations, the smaller home will almost always cost less. So what does this lower purchase price mean for you as a buyer?
Upfront Financial Relief
Purchasing a smaller, more affordable home can offer immediate savings and financial leeway, allowing you to maintain a cash reserve after closing, better afford new furnishings, and enjoy a smoother transition into your new home (and budget!).
If you are paying for your home in cash, the immediate relief is obvious—you’ll pay less money upfront. However, while all-cash offers have increased in recent years, most individuals do not buy their homes in cash, but choose to finance them with a home loan instead. Regardless, a lower purchase price can lead to major upfront savings:
- Down Payment: Down payments may not be required with some loan products, but usually are. Down payments usually run between 3% and 20% of the purchase price. While you may often choose a smaller down payment than 20%, keep in mind that what you don’t pay upfront, you’ll pay—with interest added—over the life of the loan.
- Earnest Money (Good Faith Deposit): Earnest money is cash paid upfront (1% to 5% of purchase price) to show the seller your seriousness in buying the home. While it will be applied to the purchase price at closing, if you back out of the sale you may lose it.
- Closing Costs: These costs, which generally run 2-5% of your purchase price, include many expenses linked to the value or size of the home including: pro-rated property taxes reimbursed to the seller, appraisal and property survey fees, and inspection costs.
The biggest savings on this list is the down payment. For a typical home in West Virginia priced at $290,000, a 20% down payment amounts to $58,000. In contrast, a smaller home priced at $190,000 would require only a $38,000 down payment to reach 20%, saving the buyer $20,000 upfront. Regardless of the percentage of your down payment, a lower-priced home can allow you to put a higher percentage down, which can save you substantially in the long run.
Smaller Mortgage Payments
When you finance your home, your immediate expenses are only a small fraction of the total amount you’ll end up paying. By far, the total cost of your mortgage payments will exceed those costs. Let’s revisit our example above to better understand potential long-term savings.
On the same $190,000 home with a 20% down, the monthly payment for a 30-year mortgage with a 7.5% interest rate would be around $1,060, excluding taxes and insurance, with a total cost of $384,000. By comparison, a $290,000 home under the same conditions would have a monthly payment or around $1,650, excluding taxes and insurance, with the total cost of the loan being $584,200. Over the life of the loan, the difference of $100,000 in purchase price leads to an overall savings of over $200,000.
Reduced Ongoing Costs
Not all smaller homes have lower purchase prices. However, there can still be major ongoing savings when purchasing a smaller home, whether or not your monthly mortgage payment is any less.
Utilities
With a smaller home, you may experience lower utility costs across the board. There is less space to light, less distance for hot water to travel from your hot water heater, and less lawn to water. But your biggest cost savings will likely come from lower heating and cooling costs.
It may seem obvious that a larger home would cost more to heat and cool—but the relationship between square footage and energy usage isn’t 1:1. In fact, because larger homes have more external surface area, as well as more windows and doors, they can cost significantly more to heat and cool. It can cost up to three times as much to heat and cool a home that’s only twice as big. How much can you save with a smaller home? A more modest-sized home that uses roughly half the electricity of a larger home could save you $1,800 or more each year, considering current West Virginia Electric Rates.
Maintenance
Bigger homes simply mean more to maintain. From painting and flooring to kitchen cabinets and roofing, the more you have to keep up (or replace), the more it will cost. For example, let’s compare replacement costs for asphalt roofs in West Virginia. To replace 1,500 square feet of roof, you may expect to pay $4,800 to $8,400. However, an asphalt roof replacement of 3,500 can cost $11,200 to $19,600.
Smaller homes will also often save you money on repairs and maintenance of your home’s mechanicals: plumbing, wiring, HVAC, and appliances. All homes have the same basic mechanicals that need to be regularly maintained and replaced overtime, from kitchen appliances to heat pumps. However, larger heating and cooling units, more extensive ductwork, plumbing, and wiring, and additional luxuries (think extra bathrooms and garage fridges) can all elevate replacement and maintenance costs.
Property Taxes and Insurance
Lastly, an important ongoing cost to consider are your property taxes and insurance. Property taxes and insurance are roughly based on the value of your home. Property tax collection agencies assess your home, developing a rough estimate of its value based on its square footage, number of rooms and bathrooms, and lot size. The bigger the home, the higher your taxes.
Similarly, as the West Virginia Offices of the Insurance Commissioner explains in their Consumer’s Guide to Home Insurance, age, location, size, and type of construction are some of the major factors that go into determining your insurance rate. However, larger homes may come with additional liabilities that affect cost beyond their sheer size and replacement value, including fireplaces and swimming pools.
Increased Financial Freedom
While the general rule is to spend no more than 30% of your budget on housing, there is no rule that says you have to max out this percentage. Many financial experts agree that savings should ideally be your biggest expense. With a lower monthly mortgage payment, you can create a budget that has more room to boost savings and fund greater investment opportunities, further enhancing your financial wellbeing. For instance, investing $200 extra per month in a retirement account with an average 7% annual return could grow to over $100,000 in 25 years.
Alternatively, you could use those savings to enrich your life in other ways. Saving $300 per month on your mortgage payment ($3,600 per year) could fund a memorable annual vacation, like a week-long family trip to a national park, a beach getaway, or even a cruise. Alternatively, it could mean that you can maintain your preferred lifestyle without running up the credit card debt.
The Lifestyle Advantages of Downsizing
Beyond saving money and improving your financial circumstances, choosing a smaller home can have significant impacts on your overall wellbeing. Let’s explore a few of these.
The Joy of Minimalism
Less clutter can create a more soothing environment, beyond reducing your costs for filling the space, and, of course, time spent cleaning. As seen in the rise of movements like the Tiny House trend, there is a growing cultural inclination to downsize living spaces. This reflects a societal pivot towards valuing experiences over possessions. A smaller home aligns with this minimalist approach by limiting the space available for accumulating unnecessary items and encouraging a more intentional lifestyle.
Less Maintenance and Upkeep, More Free Time
Smaller homes often require less work to keep them in good condition. For example, mowing a small lawn might take 10 to 30 minutes, while a large one could take several hours. You’ll also have fewer surfaces and rooms to clean, fewer repairs to make, and fewer opportunities for issues to arise, from leaky faucets to clogged gutters.
What will you do with your added free time? The hours saved each week could be redirected towards hobbies, family outings, or time spent enjoying your community. Smaller homes not only give you more time, but also an incentive to get out and explore your surroundings.
Environmental Impact
In West Virginia, where natural beauty is abundant and outdoor recreation is valued, eco-conscious living is increasingly important. It’s no surprise that smaller homes use fewer resources to build, as well as fewer resources to maintain—aligning with our state's ethos of conservation and respect for the scenic landscape that surrounds us. Many homes in West Virginia already lean on the smaller side, with average homes coming in at 1,700 square feet—one of the lower average size ranges in the US.
Get a Better Home
Perhaps the biggest lifestyle benefit that you could experience with a smaller home is simply a home that better matches your wants (within your budget!). Choose a more desirable location, a move-in ready space replete with upgrades, or the magazine style you’ve always dreamed of. Reducing square footage can help you check more off your wants list while sticking to an affordable budget.
Ready to buy a home? We can help!
At Jefferson Security Bank, we work hard to help local families like yours achieve their homeownership goals, offering advice for creating a financial plan to save for your purchase and helping you find the right loan to meet your budget and your housing needs.
Contact a loan officer today to learn more about your mortgage options, including fixed rate and adjustable rate mortgages, or visit your local branch in Shepherdstown, Martinsburg, and Charles Town, and Inwood in West Virginia, and Sharpsburg in Maryland to get started!