Home ownership is a good thing, but becoming house poor can have some serious financial repercussions on a family budget, from not having enough money left over to enjoy life, all the way to bankruptcy and losing the home itself.
House Poor is a term that is used to describe those who spend so much on house payments and home maintenance that there is little money left over for anything else, such as furniture or an emergency savings account.
The standard advice out there, at least from real estate agents, is to buy as much house as you can afford. They counsel prospective home owners to invest all they can and borrow to the limit for their homes. This is bad advice, unless home owners want to be slaves to their mortgage payments or put themselves into a precarious position.
When you are house poor, there are no delicious restaurant meals, relaxing vacations, sports and activities for the kids, comfortable furniture or, more importantly perhaps, sufficient retirement savings to be had. On top of this, you may be forced to pay for mortgage insurance, or PMI, money that does not go toward your mortgage principal or interest but pays your mortgage company if you happen to default on your loan.
Financial experts say that the cost of your home should not exceed your take home pay by more than 28 to 30 percent tops. This includes all of the following: mortgage principal. mortgage interest, taxes, hazard insurance, and that mortgage insurance. Some experts also include maintenance into that number. So if your pride and joy needs a new roof one year, you’ll have to add that amount in as well. The cost of home ownership is a lot more than you might think.
A good rule of thumb, if you don’t want to agonize about the financial details is to purchase a home that is no more than two-and-a-half times your salary. Thus, is you make $80,000 a year, you should choose a home with a price of $200,000 or less. This should give you a comfortable place to start. Another calculation to use to expect that you will have to pay double the principal plus interest each month on your home, whether through taxes or insurance. Thus, if you anticipate a $2,000 mortgage payment, expect to pay $4,000 when you add in taxes, insurance and maintenance.
One mistake that people often make, and is sometimes encouraged by those real estate professionals, is to calculate affordability based on future income. A better strategy is to apply any increases of income in the future toward paying off your mortgage early. You can always upgrade your home later, should you have a significant increase in income. Besides, you may want to increase spending in other areas such as an upgraded car or private school for the kids, and that should be taken into account.
What if you are already house poor? You will need to recognize your situation and avoid making it any worse. Avoid other debt, such as credit card debt, and strive to live within your means while you work to make some positive changes in the situation.
If you want to stay in your home and have built up some equity, you might be able to refinance your mortgage at a lower rate. This could free up some monthly cash for other expenses or to put toward the principal of your mortgage. You could also make the tough decision to downsize to a more affordable home, thus removing the stress of being house poor.