Is Luxury Living Hurting Your Credit?


A large home or “McMansion” is often seen as an American status symbol, a supersized American dream. For many, it’s a sign of success, but appearances can be deceiving. Living the luxurious lifestyle can cause major financial strain, especially if your income and budget are not equipped to handle the costs. Borrowing beyond your means can lead to serious consequences, including:

  • An overextended debt-to-income ratio and credit utilization ratio
  • The inability to save for emergencies and retirement
  • A failed budget
  • High credit card balances
  • Long-term credit damage
  • Foreclosure

If living large is putting you out of your means, it probably means it isn’t worth it. Here are three questions to ask yourself as your shop for a new property that may help you avoid major problems in the future.

  1. How Stable Are Home Values?

The National Association of Realtors reported a 3.2% decrease in existing home sales in July, and McMansions (which they deemed as homes with 3,000 to 5,000 square feet) represent a portion of the decline. According to a Trulia report, the premium for these homes — or the amount paid over other homes in the area — fell as much as 85% in major U.S. cities. Analysts believe a combination of frugality and dislike of home style is what caused the shift. Before you sink your savings into oversized living, it’s a good idea to do some research. Consider learning more about your neighborhood of choice to determine if the larger homes are overpriced.

  1. Will Rooms Go Unused?

Most homes have some underutilized space, but empty rooms are another story. Opting for unnecessary space means paying a higher premium over time. For example, suppose you have a choice of buying a five-bedroom, three-bathroom home in South Carolina for $350,000. Your small family only would only use three bedrooms and two bathrooms, and the formal living and dining spaces would be largely ignored. A three-bedroom, two-bathroom home in the same city is listed for $225,000. If you choose the smaller home, you may better utilize your living space and yield short and long-term benefits, including:

  • Mortgage Down-Payment: Avoiding private mortgage insurance means investing 20% or more in your down-payment. Say the $350,000 property requires a minimum of $70,000 at closing, while the $225,000 property only requires $45,000. Instant Savings: $25,000.
  • Monthly Payments: With 20% down and a competitive interest rate, you can expect to pay $1,219 per month for a 30-year fixed mortgage or a mere $800 for the more affordable property, respectively. Annual Savings: $5,028.
  • Long-Term Interest: The downside of a mortgage is accruing interest. An expensive property is sure to cost you more over time. For a 30-year fixed mortgage, you are likely to pay $202,000 in interest in addition to the principal compared to $130,000 for the cheaper home. Long-Term Savings: $72,000.
  1. Will You Be Able to Afford the Extra Expenses?

Oversized homes typically come with oversized mortgages, but it’s often the variable and hidden costs that lead to financial strain. While you can plan for a monthly mortgage payment, it’s more difficult to estimate the costs associated with things like:

  • Property Taxes: Home values may be down in certain parts of the country, but that doesn’t mean taxes are cheap. Whether you are shopping in an affluent area or prioritizing a school district, the price of luxury will show in your property taxes.
  • Utilities: Heating and cooling a large home can get expensive and electricity won’t be cheap, either. Consider the energy expenditures when choosing a larger home. Buying a modest house could save you hundreds per year in utility costs.
  • Upkeep: Association dues, lawn care and home maintenance are just a few of the expenses faced by homeowners, and they are likely to carry hefty price tags as your home size increases.

The bottom line: Keeping up with the Joneses can be tempting, but it won’t be worth it when you’re drowning in debt. It’s a good idea to make choices that suit your lifestyle and long-term financial goals.