Becoming house poor is typically not the goal when you purchase a new home. Thus, in this article, we’ll go over what exactly this means, how it happens, and more importantly, how to avoid it.
Managing your housing budget is no small feat, and there can be times where you are still feeling the squeeze despite your best efforts. Moreover, it might just be time to face the facts—you are house poor. If you are not quite sure exactly what that means, that is okay.
Generally, a homeowner is considered to be house poor when their mortgage payment is eating up a significant portion of their monthly income as they are struggling to pay the rest of their bills. Of course, this situation is less than ideal, but the good news is that you do not have to stay house poor. In fact, there are a few things you can do to get back on track when it comes to your housing budget, mortgage payment, and overall finances.
What Exactly Does It Mean To Be House Poor?
As briefly mentioned, being house poor means your monthly income is largely being spent on your home or rather your mortgage payment, so much so that achieving other financial goals is difficult. What’s more, even if you are successfully making your monthly loan payment and covering the necessities, if there is nothing left over at the end of the month, then it is time to get real with yourself.
You can also be house poor regardless of your income. The reason this can occur is because, for many, the most common cause of being house poor is due to the fact that they realized too late the true cost of homeownership—down payment, monthly mortgage payment, utilities, maintenance costs, property taxes, and more.
How Do Most People Become House Poor?
In addition to realizing the true costs of homeownership too late, homeowners also become house poor due to sudden changes in circumstances. Typically, the loss of a job, an illness, or a natural disaster can lead to a change in circumstances financially.
Furthermore, even if you are working, there are other situations that can play a factor, such as an unexpected medical expense. All these things and more can throw you a curveball, despite having the best-laid plans. That said, whatever the case, you will be in a better position financially and for the future if you are not stretching your budget to the max in order to pay housing expenses.
What Are Some Viable Solutions?
Now that you know what it means to be house poor and why it often occurs, figuring out how to improve your finances should be your next move if you are, in fact, house poor. The good news here is that there are several ways in which you can solve this issue.
Refinance Your Home
One possible solution is to refinance your home. If you have not refinanced in a while, there are a few things that could be working in your favor at the moment here. To begin with, mortgage rates are still historically low, and if you can get a lower rate, that will help you secure a lower payment.
Additionally, home values are up across most of the country, which means you likely have more equity in your home than you think. Plus, if you have recently done any remodeling, then your home’s value has probably increased as well.
Overall, having more equity in your home means less risk for lenders—less risk usually translates into a lower refinance rate. Note, you can also refinance your mortgage and opt for a longer-term, which could allow for more room in your housing budget. In this instance, you may want to consider putting more toward your payment to pay off the loan sooner, if a time comes when you have more money available.
Limit All Discretionary Spending
Alternatively, if you have experienced a recent financial setback, then you may want to limit or eliminate your discretionary spending for a while. The easiest way to do this is by essentially budgeting only for the things you must have or need.
Though limiting your spending is a great house-poor solution, it is really only a short-term solution. Nevertheless, it can be a proactive approach until a long-term solution is in place or until you get a better handle on your overall housing budget.
Use Your Savings
Along those same lines, if you are really struggling, then tapping into emergency savings is another short-term measure that may be available to you. While this is not something that should be taken lightly, your emergency funds may just be what you need to get back on track.
Note, this is often a better solution than missing payments on a home or car; this is particularly true if you are trying to preserve your credit in order to refinance your current mortgage or downsize your home.
Raise Your Income
While this approach is often easier said than done, if you can raise your income, then it is likely in your best interest to do so. Moreover, when coupled with sensible spending limitations, this could give you more security in being able to afford your home. Additional ways to ensure you are no longer house poor include:
- Finding a second job or side hustle
- Selling items you no longer need or use
- Renting out extra space in your home
That said, if an increase in monthly cash flow is still not cutting it and you feel like you can no longer comfortably afford your home, then you may want to seriously consider downsizing.
How Can You Avoid Becoming House Poor In The First Place?
To avoid becoming house poor, it all comes back to buying only as much house as you can afford. Therefore, you should make it a point to prepare for the costs of homeownership and make a reasonable budget with your monthly expenses and income. In fact, you should be deeply acquainted with both, so you know how much you can afford.
You can also avoid becoming house poor by making sure you have enough money saved up. Having an emergency fund for when the unexpected happens will ensure that you do not have to rely on your credit cards. A simple way to start is to open a high-yield savings account and make a monthly deposit, however small.
Although tempting putting in all your excess cash flow into your mortgage is something you should avoid. The last thing you want to do is have a mortgage that is paid down significantly only to have temporary cash flow issues and no savings to help keep your payment current.
Choosing a 30 year fixed over a 15 year fixed can also help you maintain payment flexibility while still allowing you to pay down your mortgage quickly if you’ve already created an emergency fund, maximized retirement, eliminate all non-mortgage debt and met all your long-term financial goals.
Ultimately, by implementing one or more of the options above, you should be able to make your current situation a passing phase instead of a permanent state. And if you properly prepare for the cost of homeownership and budget wisely from the beginning, then you can avoid this situation altogether.
That said, if you have questions regarding your mortgage or would like to know more about becoming house rich instead of house poor, then do not hesitate to contact a local mortgage professional for further assistance.
Ready to Apply For a Home?
Are you curious about mortgages, or are you ready to apply for one to buy a home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.