MORTGAGES

What Is House Poor?

DEFINITION

“House poor” can be that is used to describe a person who spends a large part of their earnings on the expenses associated with owning an apartment. These costs can include utility bills, mortgage payments and regular maintenance costs.

Key Takeaways

  • House poor refers to those who spend a significant portion of their earnings on living expenses.
  • The home-related costs may include mortgage payment as well as utilities and maintenance expenses.
  • People who are house-poor typically have difficulty paying for their financial commitments.

 

Understanding House Poor

If a person is deemed house poor, that means the major portion of their income is paid for housing every month. The majority of their earnings go to mortgage payment and property taxes, as well as utilities, as well as maintenance and upkeep. The lack of funds for house maintenance could leave you with very little cash to invest in other expenses that are essential and other expenses that are not essential..

Everyone doesn’t want to be house-poor. In most cases, people become poor when they only have enough money to purchase the house, but have to struggle to pay for the other costs that accompany owning a home.

“When your house is just half (or greater) of your salary it is possible that you don’t have enough money to cover your essential needs, or even having enough money to save or for enjoying,” Jay Zigmont, PhD, CFP, and Founder of Childfree Wealth, stated. 

Note

Between the years 2011-2021 the median house price across the United States went up more than 76%, whereas households’ median income increased by 41%.. 

 

Example of House Poor

Let’s suppose you purchased an older house that was at the top of your budget. When you purchased the home you calculated the cost and decided you could afford to cover mortgage payments tax, property taxes, as well as insurance.

When you bought the house However, you didn’t think about the amount of maintenance work that is to be expected. The square footage of this house is significantly more than the space you had in your previous home and you’ll need to buy additional furniture.

After a couple of months living in your new house After a few months, you realize that costs are higher than you initially anticipated. Most of your money is used to take care of your home and leaves little to be used for other purposes. In this scenario you’d be deemed house poor.

 

How To Tell If You’re House Poor

Based on Jon Sanborn, co-founder of Brotherly Love Real Estate, having a poor house can negatively impact your financial situation and can leave you with little money available for investment and saving. 

The calculation of the amount of income versus debt (DTI) percentage is one method to determine if you’re poor in your home. In general, experts advise that your DTI ratio be lower that 36 per cent. 6 For instance, if you earn an annual income of $60,000 or $5,000 per month, it is recommended to limit your debt to less than $1,800 per month. This means that if you have no other debts that you are paying less than $1,800 per month for your mortgage.

If you’re a holder of other debt such as one like a student loan or auto loan, you’ll have to account for that in addition. If you already pay $200 a month for the form of student loans, it’s best to limit your mortgage payment at a minimum of $1,600 or less.

Note

Certain lenders will permit an DTI that is 43% or more however, in the majority of cases the case, the DTI of 36 percent or less is suggested for homeowners. 

 

What To Do If You’re House Poor

There are several methods you could use to lower your monthly payment to help you get a mortgage by consolidating debt as well as refinancing. Find out more about it below.

Consolidate Debt

If you’re in the middle of a debt along with your mortgage debt, you might be able to combine debt in one installment loan. You can get an consolidation loan which you can use to pay off your existing debts, or even an account balance transfer.

Tip

You may also apply for an equity loan for your home and use it for the payment of any debts that you are in. It will lower the number of payments per month and could lower the interest rate when your other debts carry higher interest rates.

If you decide to consolidate your debt with an equity loan for your home be aware that you could lose your home if do not pay it back.

Refinance

If you’re able to secure an interest rate that is lower than when you got the mortgage you might consider refinancing your home. It’s generally an excellent idea to refinance when you can secure an interest rate at least 1% less than the original rate. If you do you’ll likely lower your monthly payment. 

Warning

Even if you’re in a position to lower your mortgage’s interest rate to 1% make sure you do the math prior to refinancing to ensure that the costs won’t be more than what you’ll save. You’ll probably pay about 2% to the 6% of the balance on your loan in closing expenses. 

If you have between 15 and 20 years remaining in your loan, for instance you may want to refinance in order to alter the duration of the loan term. A longer time frame can lower the monthly cost, but it usually means that you have to pay more interest.

Get Another Job, If You Can

The presence of an additional source of income could help lower the DTI ratio and help make your expenses appear less overwhelming. If you have the time and capacity to take on the task, consider doing additional work. A few examples include dog walking, tutoring or any other kind of job that you can take on during your free time.

Sell Your Home

In the event that you are spending far more than what you can comfortably afford every month It’s possible to think about making changes to your lifestyle through selling your house.

If you think you will save significant cash on your monthly bills by renting, think about this option until you’re able to save for a larger down amount. Also, you could look into purchasing a cheaper property or one that needs lesser maintenance.

Tip

The purchase or rent calculator could be useful in determining which choice is most suitable for you. Consider monthly payments as well as the housing market in your area at the time you’re considering moving.

Get Rid of PMI Payments

When you reach 22 percent of equity on your property and you have a PMI private mortgage (PMI) credit will automatically be cancelled. 9 However it is possible to stop making PMI payments prior to that. If your home’s value has risen significantly since you bought your house, you might consider having your house appraised.

It is also possible to get a home equity loan or HELOC which you can use to pay off the majority that the initial downpayment for your mortgage principally to cease making PMI payments.

Reduce Discretionary Spending

If you’re still feeling uneasy, and your DTI is lower than 36 percent and you’re spending less than a quarter of earnings for housing You may want to look over the budget and monthly expenditure to find areas where you could reduce. 10 Some ideas to think about temporarily eliminating or reducing your expenditures are monthly subscriptions, dining out.

 

How To Avoid Becoming House Poor

If you are homeowner there’s several ways to stay away from getting house-poor. The first is to make sure you have a an accurate estimate of your daily expenses and also your housing expenses.

Budget

Sanborn suggests using the 50-30-20 budgeting technique–put 50 percent of your earnings towards accommodation and other expenses that are necessary while putting 30percent of your earnings for leisure and the remainder could be put towards investment and savings.

Note

There are many ways to budget to pick from. You’ll need to choose the one that is most suitable for you.

Don’t Over Finance

Zigmont suggests keeping your monthly expenses for housing which include mortgage payments tax, interest, and insurance in the range of less than one-third of your earnings. Many banks will accept you for more, so it’s essential to know what you’re able to afford.

Be Realistic When Purchasing a Home

To avoid becoming house-poor, Zigmont recommends only purchasing a home in the event that you truly afford it.

“You are in a great situation to buy a home with no personal debts, and a 3 to six-month emergency fund, and the 20 percent down payment,” the expert said.

the authorAaron Krause

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