• Buying or building an expensive home may seem like a good investment, but stretching your finances too far so you can live in an expensive home can be problematic, especially if the real estate market does not perform well. As a general rule of thumb, aim to purchase a home that costs about two and a half times your annual income at the most. Spending more than this amount will increase the chances of financial hardship.
  
  

Disposable Income

• The more expensive your home, the larger your mortgage bill will be. The larger your mortgage bill, the less money is leftover for other bills and to contribute toward savings and entertainment. Buying an expensive home may mean that you have to work harder and have less time and money to spend on leisure activities. An expensive home could result in fewer opportunities to take vacations or having inadequate money saved for retirement or your child's education.
  
  

Unexpected Expenses

• One of the biggest problems with buying or building and expensive home is that you may have little financial flexibility to cover unexpected expenses or changes in income. If you commit too much of your monthly income toward you home mortgage, sudden medical expenses or car expenses may be difficult or impossible to pay for without taking on more debt. This can lead to financial strain that increases the likelihood of bankruptcy and foreclosure. Buying a less expensive home will allow for greater financial flexibility and greater ability to overcome unforeseen hardships such as the loss of a job.
  
  

Home Upkeep

• Another drawback of expensive homes is that the effort and costs to keep up the home will be higher than they would be with a less expensive home. Real estate taxes are based on the value of a home, so you will owe more taxes each year when you live in an expensive home. General home maintenance such as painting and roofing work will require more labor and materials for larger, more expensive homes. The costs of heating and cooling a home will also typically be higher the larger it is, and these costs do not build equity.
  
  

Selling a Home

• A potential problem with owning an expensive home is that it can limit the market of potential buyers when the time comes to sell. For instance, there are far fewer people who can afford a home that is worth $1 million than can afford a home that is worth $200,000. This could extend the time it takes to find a buyer.