To be house poor is to spend so much of your income on your home that you can barely afford to use your money for anything else. Rather than being a source of financial stability in your life, your home is a weight around your shoulders which is draining your monthly income and your savings. Put another way, you’ve bit off more than you can chew when you’re house poor. With that said, let’s go over what it really means to be house poor and how to avoid it.
Let’s Be Specific.
Say for instance you just bought a home in Chicago Real Estate. You took out a large loan but according to online mortgage calculators and your realtor, you thought you could afford it. But as the months go by, the hidden costs of owning a home start to mount up alongside the mortgage payments you might have already been prepared for. Winter comes and your utility bill climbs, your home has undisclosed problems that you have to deal with, or your roof springs a leak and you have to pay your insurance deductible to get it fixed. Before you know it, your savings are rapidly disappearing and you’re hardly able to put any money aside at all.
Even though you’re making a good salary and living in a nice Chicago suburb, you’re house poor. The essence of being house poor has nothing to do with your income, and everything to do with how much of your income you have to spend to stay in your house.
How Do You Know If You’re House Poor?
The above example was a bit dramatic for the sake of demonstration. Being house poor isn’t always so obvious, it can sneak up on you and circumstances outside of your control, a changing economy, health emergencies, etc. can make you house poor even if you were careful not to buy a house you could not afford even in the best of times.
If you have to use your savings consistently to cover your monthly payments, you’re probably house poor. If you feel overly constrained financially by your monthly payments, you’re probably house poor. Though owning a multi-hundred thousand dollar home should definitely cost you something, if it’s taking up so much of your income that you can’t do anything else, you need to make a change, or you’ll stay house poor for a very long time.
How to Avoid Being House Poor
The key to avoiding being house poor is prevention. When you’re calculating how large of a loan you can afford to take out from a lender, err on the side of caution. Just because you can take a large loan and get a big house doesn’t mean you should. A dream home can quickly turn into a nightmare home if it makes you house poor.
Make sure that your monthly payments (i.e. your mortgage, HOA fee, utilities) are not taking up more than 28% of your monthly income after tax. Once you go over that threshold, you’ll find it much harder to save money and meet other payments such as car insurance, car loans, phone payments, as well as basic necessities like food and gas.
Know The Cost of Ownership Before You Become An Owner
Your downpayment and monthly mortgage payments are just one of many regular expenses you’ll need to make in order to own a home. You need to factor in costs like your utility bills which will change over time, repairs which can average $3,000 a year, HOA fees which vary by community, and property taxes which are different everywhere you go.
Before buying a home, work closely with a realtor and/or a financial consultant and do your homework on what you can expect and plan for when you own a home. Property taxes can be especially tricky to prepare for because they can change over time. Rising property values mean rising property taxes, so even when the market is doing well and your home is appreciating, once it gets reassessed you’re going to be paying more in taxes for it. Can you afford that?
Don’t just save up enough money for your down payment. Save up enough for the down payment, the closing costs (conservatively, about 6% of the price of your home), and about six months of your regular monthly expenses after you have bought the home. This will give you a good start on staying ahead of any hiccups and accidents in life that can suddenly drain your savings and have you living paycheck to paycheck to afford your home.
There’s No Sure Way to Avoid Being House Poor
Everyone can get unlucky. The bottom can suddenly fall out from under all of us. If you’re not already house poor, the best thing you can do to avoid being house poor is to consistently save enough money to cover yourself when things go wrong. Clearly, you can only do so much, but if you can even cover around 60% of unforeseen expenses, that will go a long way in keeping you from becoming house poor.
What To Do If You Become House Poor
Budget
Before anything, create a budget of how much you spend each month. Be honest and make a truthful account of each purchase first. At the end of the month, take a look at what you’ve spent and adjust accordingly if you can. Your budget should be realistic, not idealistic. The best benefit of a budget is that it will let you know exactly where you stand and what you can change and what you can’t change in your monthly expenses.
If after you’ve budgeted yourself and you’re still finding those monthly payments to be nearly overwhelming, it’s time to explore more drastic options.
Refinance Your Home
When you refinance your home, you’re working out a new mortgage with your previous lender to replace your current mortgage. To help you avoid becoming house poor, you’ll want to renegotiate to either a lower interest rate or a longer loan term. Those two things go together. This will result in you making lower monthly payments which will help you save money together and get out of being house poor. The downside here is that you’re lengthening the term of your mortgage, which means in the long run you’ll make less money if/when you sell your home. If you don’t want to sell your home but you’re house poor, refinancing your house is probably your best option.
Sell Your Home
If refinancing your house won’t make a big enough difference to your monthly expenses, it might be time to sell the house. In this scenario there’s a good chance you haven’t built much equity in your home, meaning that when you sell you’ll have just enough money to pay off your mortgage and get out of debt. The further along you are into your mortgage term, the higher a profit you’ll make when you sell.
But when you’re house poor it’s hard to think long term. It might be better to endure the pain of making less of a profit and paying closing costs again if it means you’ll be eliminating the largest drain on your monthly income.
What Does It Mean to Be House Poor and How to Avoid It
In short there’s no easy way to get out of being house poor, but it’s not impossible. If you’re able to make some money after selling your home, you might be able to turn around and buy a much more affordable home. It might seem easier to just stay where you are and make do with what you have, but you’ll be better off financially (and probably happier) if you sell the home that’s making you house poor and buy the home that will make you wealthy in the long run. If you’re ready to make that change, get in touch with a real estate agent today.
