Are You House Poor? How to Avoid It

If you’re house poor, you’re spending far more money on your home than you should.

This does not allude to costly renovations or add-ons, but rather the cost of the home itself.

People who spend more than 40% of their income on home expenses like mortgage payments, taxes, and utilities are said to be house poor.

Being home poor means having little money left over to pay for non-requirements and essentials that aren’t tied to the housing, such as food and car payments.

house poor

What Causes People to Be House Poor?

There are two major reasons people become house poor: a lack of understanding of the full expenses of homeownership and unexpected life changes.

Changes in Circumstances

In normal circumstances, losing a job is a difficult pill to swallow.

Many people are now losing money due to a circumstance that is absolutely beyond their control, as a result of the present national conflict with COVID-19.

Furthermore, this scenario makes finding a job to replace the lost income considerably more difficult.

Even if you’re employed, other factors can come into play, such as a large unexpected medical bill.

These things can throw your best-laid plans for a loop.

Whatever the case may be, you’ll be in a better financial position in the future if you don’t overextend your budget to cover housing costs.

Read: 12 Recession Proof Jobs

Misunderstanding Homeownership Costs

Purchasing a home entails more than just making a mortgage payment.

Before moving through with a home purchase, it’s a good idea to do some research on future household bills so you don’t get caught off guard.

Many expenses may cost more than you expect, so the more information you have before you commence, the more prepared you will be.

Here’s a list of expenses to consider in addition to your mortgage.

Home maintenance costs

Something is bound to break in your house at some point.

While it’s impossible to say when main systems, the roof, and any included appliances were last updated, you may make educated predictions based on the home’s age and when major systems, the roof, and any included appliances were last replaced.

Annual maintenance charges are typically between 1 and 3% of the purchase price of your house.

The age of your home will frequently determine whether you are on the low or high end of that spectrum.

Read: Get Rich Quick Schemes: How to Spot Them

Property taxes

Although property taxes, along with homeowners insurance if you have an escrow account, are normally included in your monthly mortgage payment, it’s crucial to remember that your mortgage lender is preapproving you based on a projected first property tax payment.

This is one of the most important factors that varies year to year.

If the value of your home rises, your taxes are likely to ascent as well. Make sure you understand how rates are determined and how often values are evaluated.

Looking at city property records can also give you an idea of prior taxes.

Down payment and closing fees

Although the down payment and other closing charges are paid in advance and are not considered monthly expenses, they represent a large outlay of funds.

With that in mind, think about how much you need to put down on a house in relation to your other financial goals and plans for the future.

Homeowners association (HOA) dues

These are included in your monthly mortgage payment that a lender uses to qualify you, but they aren’t in an escrow account and aren’t part of the payment.

As a result, it’s simple to overlook them until they’re due.

They also have a tendency to increase over time. You can prepare yourself by chatting with the HOA about the current dues and, if feasible, obtaining a back history.

I hope you have seen how easily you can end up being house poor without even intending for it.

When you Buy a House You Can’t Afford

Whether you’re buying your first house, a vacation home, or a rental unit, you probably consider it more of a personal asset than an investment, right?

Well, not if you don’t want to be house poor.

People who flourish in homeownership, in my experience, see their home as an investment from the start.

That isn’t to say they don’t live in it and make it their home; rather, they approach it with the same mindset that any investor would have when looking at a property.

One that is anchored in reality and based on numbers (not feelings).

They understand the consequences of being financially engaged in a home beyond their means.

They also make every effort to prevent it. Being house poor has significant consequences, such as:

Your funds/savings will be depleted if you are house poor

Putting everything you have into buying the home of your dreams, as noble as it may sound, can destroy your savings.

Do you require a new bed? You can end yourself in debt as a result of it.

Is it time to replace your car? You can end yourself in debt as a result of it.

Is it necessary for your children to attend college? They’ll be in debt as a result of it.

You don’t have enough wiggle room to take care of life’s other necessities while you’re house poor.

Your retirement savings objectives are affected

Some retirement accounts, such as a Roth IRA, allow you to borrow money from your account to purchase your first house.

While it’s comforting to know that you have the choice, it can entirely derail your retirement plans, especially if you don’t manage to repay the loan.

If you’re considering borrowing against your retirement funds, you should assess if you’re actually financially prepared to make the purchase.

It could be a sign that something isn’t right.

Read: Using 401k to Buy a House

Being house poor has an impact on your ability to pay off your other debts

If you have debt other than your mortgage, such as credit card debt, it’s a good idea to budget for all of your monthly payments before committing to a mortgage payment.

Otherwise, if you are house rich but cash poor, you may find it difficult to pay off these new loans.

This will have an impact on your ability to get out of debt.

Being house poor can have an impact on your long-term ambitions

A mortgage can last up to 30 years on average.

The reality is that the rest of life will pass through that window as well.

You could still want to travel, eat out occasionally, or take that class you’ve been eyeing for a long time.

Your mortgage should not prevent you from doing so.

If done correctly, your mortgage should still allow you to follow your other passions without feeling guilty.

How are you going to do it?

Set a strict limit on how much of your monthly take-home earnings goes toward your mortgage payment.

home poor

Avoiding Being House Poor

Being house poor is very rampant all over the world.

It may be avoided, though, with good planning and preparation, as well as keeping your position in mind when making judgments.

Among the ways to avoid being house poor are;

Remember to Keep Things in Perspective

Although owning a home is nearly a need for all adults, bear in mind that you are not required to buy a property by a specific age.

It’s easy to feel behind or failed if all of your friends are buying houses and society is forcing you to do the same, but don’t let this pressure push you into buying a house you don’t fully desire or can afford.

It’s absolutely OK to rent until you’re ready to make the financial commitment to purchase a home.

Your success and value should not be dictated by your ambitions for homeownership, and adopting this perspective will make your mortgage experience lot less stressful once you get there.

Ensure You Plan

If you know you want to buy a house, you should do your homework to select one that you like and can afford.

Make a budget, and keep in mind that buying a home is more than just a down payment and a mortgage.

You must also include expenses such as utilities and taxes when calculating your house purchase prices.

You might want to reevaluate your plans if you find out you’ll be spending more than 40% of your salary on your property.

Examine various property sizes and types, as well as neighborhoods and costs, to discover a home that matches your needs without putting your budget under too much strain.

Engage a Broker

Even if you meet the minimum requirements for a mortgage, that doesn’t imply it’s the best financial decision for you.

You’ll need to plan ahead to determine if particular mortgage payments are something you’ll be able to afford over the course of your loan.

That’s why it’s crucial to speak with a mortgage broker before you start looking for a home.

Brokers assist you in understanding your options and determining the best course of action for you.

They may also assist you with your budget, purchasing power, and the estimated cost of a home once closing charges are factored in.

In conclusion, I hope you have learned something about being house poor, and you will take the necessary steps to avoid getting in this trap.

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