If you’re house poor it means that more than 30% of your income is going toward mortgage payments and housing costs. You likely do not have funds for savings and expenses.
You likely have less money to spend on groceries, utilities, transportation, travel or medical expenses. Long periods of being house poor means having less money for retirement and having to charge more to credit cards.
How Does Home Equity Impact Your Living Expenses?
Increasing your home equity can help if you need a loan, but doesn’t help with your day-to-day living expenses. Your house is a sizable asset, but you have little means to pay for expenses. Home equity, on the other hand, isn’t liquid.
Will Refinancing Increase Your Cash Flow?
Refinancing can impact your financial situation in the following ways:
- Decreasing your monthly payment
- Allowing you to switch from a variable interest rate to a fixed rate
- Applying for a cash-out refinance to pay for urgent expenses
House Poor Homeowners and Added Financial Strain
Dealing with added financial strain can magnify stress for house poor homeowners.
With high mortgage payments and interest rates above 6%, you can easily spend more than 30% on housing costs excluding other expenses that come with home ownership.
How Property Taxes and Insurance Affect Homeowners
Your property taxes will go up, adding to your cost of ownership if your home’s value increases.
Don’t forget the cost of homeowners insurance, either. Inflation and natural events have been driving up the cost to insure homes. These expenses can push house-poor people even further into debt if they’re already feeling the burden. You may have an added financial burden if your house value increases
4 Smart Strategies To Reduce Financial Burden
If you’re already house poor, how do you climb out? Try these strategies:
- Seek lower interest rates. If you can get a lower interest rate, do not miss a chance to refinance. Lower monthly payments can help you climb out of a debt hole.
- Sell your home. If it is becoming too much to carry the financial burden of your home, try to sell your place and downsize.
- Make the most of your home. Try to get income from your home by renting out a room. These funds could help with mortgage payments or house expenses.
- Make cuts. Try to cut discretionary spending where you can.
Why a Healthy Credit Score Matters To Avoid Foreclosure
You don’t want to jeopardize your credit score or risk foreclosure if you’re house poor.
A foreclosure will remain on your credit report for seven years. Here are key ways to avoid this:
- Make your house payments on time
- Do not take out new debt
- Keep credit card balances low
Having a manageable debt-to-income ratio is a healthy sign that you aren’t pushed to the max in terms of how much you owe other people. Lenders want you to have a debt-to-income ratio below 36%. Ideally, only 28% would go to your housing costs.
Can I Afford a $300K House on a $70K Salary?
On a $70,000 salary, it’s recommended to use only 28% of your income toward housing — that’s $1,633 monthly. A $300,000 house requires $2,000 monthly, which puts a strain on your debt-to-income ratio unless you hvae no other debt.
Why Down Payments and Closing Costs Matter
If you are able to pay a higher down payment, you likely won’t have to purchase private mortgage insurance (PMI) and you’ll have a lower monthly payment. However, with a lower down payment, expect to pay PMI as well as higher monthly payments. Closing costs can be 2% to 5% of the cost of the home.
First-Time Home Buyers and Their Financial Goals
When you buy a home, you’re making an impact on your long-term financial goals. You need to ask key questions, such as:
- Can I afford the mortgage, closing costs and other expenses associated with buying a home?
- Can I buy this home and still have an emergency fund and the ability to save?
- Will this purchase align with other milestones I may have, i.e., career change, etc.?
Emergency Funds and Savings: Plan Smarter, Decide Better
You should have at least three to six months’ worth of savings even after you make the down payment. This is key because it protects you in case of job loss, health emergencies and other house expenses. You want a healthy savings account because you don’t want to take on high-interest loans or debts to pay other expenses.
The Costs of Homeownership Beyond the Mortgage
Every home has costs beyond just the mortgage payment. Here are some of those costs:
- Maintenance costs: You have general upkeep of a home including pool and lawn maintenance, any repairs relating to HVAC, roof repair or appliance replacement.
- Home insurance: It could cost up to $2,000 annually to insure your home. This cost is dependent on the location, size and coverage needs.
- Property taxes. This expense is paid annually and can rise based on home values.
- HOA fees: This fee includes amenities and maintenance, and can range from $200 to $600 per month.
- Utilities: Includes gas, water, electricity and trash.
- Unexpected expenses: You will have to account for air conditioning or water heater replacement and other issues with the home.
Real Estate Fluctations and How They Affect Homebuyers
Even if your mortgage is affordable, real estate fluctuations can impact both home buyers and homeowners.
| Home Buyers | Homeowners | |
|---|---|---|
| Rising home prices | At a greater risk of becoming house poor, due to a large down payment and monthly costs | Gain equity, but property taxes and maintenance costs may cause financial strain |
| Falling home prices | Housing is more affordable | Could cause negative equity and may make it harder to sell or refinance your home |
| Rising interest rates | Higher borrowing costs may lead to becoming house poor | It may be more difficult to sell home |
| Falling interest rates | Improves affordability | Can make refinancing easier |
What Are the Long-Term Implications of Being House Poor?
Being house poor makes it difficult to achieve other financial goals since you’re spending so much money on your house. You may be able to save less money for retirement and an emergency fund. Being house poor will push you to use credit to pay off other debt and it causes delays in life milestones.
Any shifts in your finances can feel magnified because you’re house poor. If you lose your job, it can be difficult to keep up with mortgage payments and relocating isn’t an option. There will also be a struggle to cover basic bills as well, if you don’t have a backup plan.
How To Keep Your Home Affordable, No Matter What
If you want to avoid becoming house poor, you can take proactive steps:
- Find a home that costs less than 28% of your income.
- Build your emergency fund before, during and after the purchase of your home.
- Opt for a fixed rate mortgage so you can avoid rate changes.
If you’re already house poor, there may be some options in your situation:
- Determine if you can refinance.
- Cut discretionary spending.
- Try to boost your income.
There are benefits to being a homeowner that bode well for your finances and wealth in the long term. Affording your home, no matter what happens along the way, starts with careful planning and a smart strategy to keep you afloat.
FAQs: What Is House Poor?
Housing costs causing financial strain? Find out what house poor means and how to manage costs with these answers to your questions.- What counts as house poor?
- When more than 30% of your income goes toward your mortgage payment or housing costs and you have little cushion for savings and expenses.
- How do rising home prices impact homeowners?
- This increases a homeowner's equity, but also makes moving significantly harder. In addition, the homeowner may pay more in property taxes.
- When will mortgage rates go down to 4%?
- Currently, 30-year fixed mortgage rates are hovering at 6.15%, while 15-year fixed mortgage rates are at 5.86%. It may be some time before we see mortgage rates going down to 4%.