Picture this… You’ve searched and finally found the house of your dreams – shiplap walls, dark roasted hardwood floors, so much natural light you feel like its heaven. You get the green light for a mortgage, sign the papers at closing, and get the keys. But, after you’ve made your first payment you realize you don’t have any money left to buy furniture, finish the landscaping, go out to dinner – or even pay your credit card bill. You’ve now found yourself stuck at home on the old crusty couch you’ve been wanting to replace. But hey – that natural lighting though. You’re now officially house poor.
So what exactly is house poor you ask? Well, it’s when your mortgage payment exceeds about 40% of your monthly budget. According to financial guru Dave Ramsey, you should stick to a housing budget (mortgage payment, taxes, and insurance) of about 25% of your monthly take home pay to be more comfortable. Many Americans fall into living paycheck to paycheck because they are house poor. The more wiggle room you leave in your budget as you plan for housing costs, the better able you will be to handle income changes, rises in property taxes, home repairs and the like so that you can avoid being house poor.
Here are some things to keep in mind to avoid the detriment that is house poor:
» Know What You Truly Can Afford: First and foremost, know exactly what you can truly afford versus what you’ve been approved for. As we mentioned a moment ago, a heathier percentage is to stay around the 25% range. Many times your pre-approval is based on your gross income, not your take home pay. Your budget should be created around your take home pay.
» Fixed Rate: If you are looking a longer term loan that won’t be paid off quickly (30 years), it’s typically safer to go with a fixed rate so that you know exactly what your monthly payment is. If you’ve found yourself drowning in your current variable rate mortgage, refinancing could very well be a great option for you to reduce your monthly mortgage payment. Our mortgage lending experts can help you with that.
» Save for a Down Payment: If you are a first-time home buyer, the best way to avoid becoming house poor is to build up a substantial down payment which will help lower the percentage of your housing costs from the get go. Even after you’ve used your down payment funds on your new home, continue to save money for the unexpected things that can occur.
» Keep Your Debt Down: Homeowners that maintain a significant amount of debt (credit cards, personal loans, auto loans, etc.) quickly find themselves as house poor. Once the mortgage and all of those debt payments are made, they find themselves in hot water with little to no money left over so they continually carry a balance, or swipe the credit card for pay for groceries. Avoiding this is absolutely a safety precaution to not fall into becoming house poor.
When you ready to take the next step towards buying or refinancing, we’re here to help give you honest solutions that you can truly afford.