We’ve all heard of that person, the one that bought a beautiful home on a big lot of land and no one quite seems to understand how they can afford it. In fact, it’s not just someone we hear about but it’s actually the majority of people in the United States. In a survey taken earlier this year, 69% of homeowners revealed that they feel ‘House Poor.’*
So what does it mean to be House Poor? While the numbers vary for each individual, it essentially means that someone spent too much money on their property and they have little leftover for other things in life. They may live in the nicest home on the block, or in the best location in the state, but affording to go out to eat, go on vacation, or pay an emergency expense becomes a struggle. It’s why financial professionals are always warning people not to take on too large of a mortgage, even if the bank approves you for one.
You might be thinking to yourself ‘Okay but if the bank says I can afford this, surely, I can… right?’ Not so fast. When the bank looks at your financials to approve you for a mortgage, they’re mainly focusing on your debt-to-income ratio. Meaning they want to see that you can cover all of your outstanding debt with the money you earn. They’re not asking you about the lifestyle you want to live, how much you want to save, or what you like to do for fun. Without taking this into account it’s impossible to get a realistic sense of what the mortgage that you could easily afford would be.
Now that we understand what being house poor is, and how so many people fall into the trap. Let’s talk about ways to avoid making this financial mistake-
Have a very clear understanding of your cash flow. How much of your monthly paycheck goes to savings? What about to bills? How much do you have leftover? Is that amount comfortable for you to live off of and does it cover all of your ‘fun’ expenses – restaurants, sporting events, vacations, etc.? Knowing this will help you determine the monthly payment that can go towards a new home without breaking the bank.
Determine ‘how much house’ you really need. Do you need five bedrooms if you only have two kids? Would you value living on a golf course if you don’t even like golf? Little things like this can make a big difference when it comes to the price of a home, and making sure that the property you buy is actually what you need can help manage the urge to buy too much house.
Finally, think about what you value most. Houses are our biggest assets, and we all want them to feel like home. But, sometimes having the biggest house isn’t on the top of our priority list. It might be retiring early, supporting your kids through college, or even saving for something else you’ve always wanted to do or buy. A house doesn’t need to be a mansion to feel like a home. Make sure to align your spending with the things that bring value and joy to your life, so you’re not kicking yourself with a mortgage payment the size of your paycheck every month.
Being house poor is not a unique problem. In fact, nearly 7/10 homeowners feel that way. By following the steps outlined above, you can get guidance on how to budget for an affordable home the next time you’re looking to buy. And if you find yourself already feeling a bit out of control with your mortgage, talk to your wealth advisor. They can come up with ideas to help you get back in control of your finances, whether that’s refinancing, downsizing, or even renting a part of your home!
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.