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How to Avoid Being House Poor

Buying a home is exciting and everyone wants to own a home. Although owning a home is good, it shouldn’t be to the detriment of your financial stability. When planning to own a home, make sure that you budget for it so that it doesn’t affect your finances negatively. As a rule of thumb, you should not spend more than 30% of your household income on house ownership. 

Here, you are going to learn what it means to be house poor, how to avoid being house poor, and how to get out of the situation if you are already in it.

What Does it Mean to Be House Poor?

Being house-poor is a situation where one spends a large proportion of their income on homeownership through mortgage payments. Such a person tends to use all their income in homeownership and is left with no money to spend on other living expenses. You can be house poor even with a huge salary if you spend too much of your income on homeownership.  

How to Not Be House Poor

The following are some of the ways you can avoid being house poor:

1. Buy that which You Can Afford

One of the ways to avoid being house poor is to buy a house that you can afford. Don’t get into debt trying to own a home. Also, limit your household spending to a maximum of 30 percent of your household income. If you must borrow, then make sure that the debt is manageable. Otherwise, you may fall into a debt trap.

2. Build Up an Emergency Fund

You need to have a savings account that can help you build up your emergency fund. An emergency fund helps you in times of unexpected outcomes like the loss of a job. As a rule of thumb, make sure that your emergency fund can pay for your living costs for at least six months in case you lost your job.

3. Payoff Your Consumer Debt

Having too many debts can make you house-poor. Before borrowing a mortgage, make sure you first pay off your consumer debts. It can be challenging to pay a mortgage while also paying other consumer debts and this can lead to a financial crisis. When you pay off both mortgage and consumer debts, you will be left with very little to spend on living costs.

Also read: Should I invest or pay off debt?

4. Budget for Home Expenses

You also need to budget for home expenses to avoid being house poor. Home expenses like repairs, improvements, and renovations cost a lot and you need to plan for them prior. Set aside some specific amount of money every month that you can use for home maintenance.

5. Make a Larger Down Payment

You need to save up for a decent down payment toward your home. Paying a larger down payment gives you more equity in your home and it will reduce your monthly payment. It will also reduce your interest rate which can save you thousands of dollars. When lenders see you have a good loan-to-value ratio, they tend to lower interest rates.

What to Do if You are House Poor?

If you are house poor, then there are things you need to do to bail yourself out of the situation. Some of these things include:

1. Increase Your Income

You need to boost your income if you are already house-poor. One of the ways to increase your income is by getting a second job. You can look for a part-time job or start a side business that can be generating you some money.

2. Refinance Your Mortgage

The other way to avoid being house poor is to refinance your mortgage. Refinancing your mortgage can lead to two things, lower interest rates or extension of the length of your loan. The consequences of the two is that they can lower your monthly loan repayment.

3. Sell Things You Don’t Need

If there are things that you have in-house and you no longer need them, you can consider selling them. There are many marketplaces where you can sell second hand items. Besides, this can help you decongest your house with many unnecessary items.

4. Cut Down Your Spending

Lowering your spending is something you would also need to consider if you are house poor. Find areas where you are spending above your means and cut down on them. Direct the money into repaying your mortgage and other living expenses.

5. Rent Out a Room in Your House

If you have a large house, you can consider starting an Airbnb business where you can make an average of $500 per month. You don't even need to own property to start Airbnb business. You can rent out a room in your house and make money from it. Besides, you can look for a roommate with whom you can cost share living expenses like electricity and water.

6. Sell Your House

If you are spending too much on your house and it has made you become house poor, you can also consider selling it. Spending all your income on homeownership is a wrong financial move. The solution to such a problem is to sell your house. 

How Does Being House Poor Affect Me Financially?

There are many ways being house-poor can affect you financially:

  • It depletes your savings
  • It makes it challenging to repay other debts
  • It can affect your ability to save for your retirement
  • It creates a feeling of financial stress and anxiety
  • It can affect your credit for instance if you miss on your mortgage repayment

Summary of How to Avoid Being House Poor

It is a good thing to own a home. However, it is a bad thing to be house poor. As such, when owning a home, you need to put a balance between homeownership and being house poor. Make sure to budget for a home before taking a mortgage to buy one. Also, make sure that your expenses on home ownership do not exceed 30% of your household income.

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