Unfortunately, being house poor can sneak up in a lot of ways other than a home curiously devoid of furniture. It may mean that you don’t have the resources for needed updates or repairs (which can impact your future home value), it can even make it difficult to pay other bills, such as car payments, credit card payments, etc. You don’t want to get into a situation where you have to decide if you are going to make your mortgage payment or pay your light bill…that is great way to instantly ruin your credit.
So how do you keep from becoming house poor in the first place?
Don’t Max Out Your Pre-Approval Amount
We’ve mentioned this in previous blogs. When you get that magic number from the mortgage company on how much home you can qualify for, many people start looking at homes at the top end of their price range. Invariably, they fall in love with a home that is a stretch financially, but they become so emotionally attached that they make an unwise decision.
What many don’t realize is that the mortgage pre-approval amount takes into consideration what you could be approved for, right now, in your present situation. It doesn’t anticipate future repairs or even take into consideration future utilities or childcare costs, or the multitude of other expenses that families face. It’s up to YOU to do the math.
- First, calculate your TOTAL monthly mortgage payment, which will likely include: principal, interest, taxes, insurance, private mortgage insurance, homeowner’s association dues, etc.
- Start with how much you want to sock away in retirement investments.
- Add your car insurance, life insurance, medical insurance, homeowners insurance, and all the other monthly expenses.
- Add in utilities, food, childcare, the cost of all your kids activities, vacation funds, and the like.
- Add in any debt payments, such as credit cards, car payments, student loan payments, etc.
- Add in any new expenses that will occur once you become a homeowner – will you need to buy a mower or hire a lawn service? Will you have pool maintenance? Will you need to hire a house cleaner? Will your commute be longer, which translates to increased fuel costs?
Add all these additional expenses to your total monthly mortgage/housing payment. Next add on a few hundred dollars as a cushion to build a rainy day fund.
What’s the total? Compare that to your monthly income. If it’s more than what you make every month, or if you are going to be down to pennies in your checking account the day before pay day, then you are setting yourself up to be house poor. All of your expenses should be LESS than what you are bringing in each month in your paycheck. You want to have money left over every month, after all your obligations are met. Otherwise, you are going to be eating peanut butter sandwiches by candlelight.
If you are buying a new home, and you already have a slew of fixed expenses (or anticipate them in the near future because of a baby on the way or the like), then the only place you can adjust is to lower your housing cost. This may mean you will have to look for a home that is considerably less than what the mortgage company is willing to approve you for.
Don’t Plan on Immediate Remodels
which will harm your property value AND your quality of life.
Once you do start to make changes and making purchase for your home, spread them out over time. This will help you continue on the right path of saving and maintaining a slush fund, with less temptation to dip into it with accumulating purchases.
Consider a Home Warranty
Depending on who you talk to, the advice on this may differ. However, if the thought of having to come up with a few thousand dollars for a new refrigerator or air conditioner a few months after moving makes you hyperventilate, then the peace of mind a home warranty may bring you could be worth the expense. This way, some of the cost of repairs or replacement of major mechanicals and appliances may be covered.
Rethink Your Taxes
Once you are a homeowner, what worked for you previously may not be the best option now. Re-examine your tax withholding and make adjustments if needed to put more money in your pocket each month, rather than holding out for a big refund. Also, make sure you are getting all the exemptions you are entitled to as a homeowner, such as Homestead exemptions, which can help you save big on property taxes.
We can help you figure your options that will fit within your budget and help prevent you from becoming “house poor”. We can also provide a referral to a great mortgage lendor or financial advisor who can help. When it comes to buying or selling your home, we are here to help answer any questions and guide you through a better understanding. Please do not hesitate to contact us at firstname.lastname@example.org or phone us at 202.800.0800.