It’s no secret that buying a home is one of the biggest financial decisions you’ll ever make. Becoming a homeowner has often been a symbol of the American Dream, but it’s important to realize how a high mortgage can eat into your disposable income.
Millions of Americans are considered ‘house poor’ because a substantial amount of their income and budget are dedicated to housing costs.
How do you know if you are house poor exactly? For starters, your housing costs may be preventing you from meeting other financial goals like saving, traveling, or even spending money on fun and entertainment. While your mortgage can be a sizable expense in your budget, it’s not the only cost you’ll have to cover each month.
I love owning a home, but I also don’t want to spend every dime I make on a mortgage, repairs, or utilities. I’m sure you wouldn’t want that either. You should still be able to enjoy life and save money as a homeowner, right? If you’re wondering how to avoid being house poor, here are 5 key things to do.
1. Understand How Much a House Really Costs
The first thing to get a clear grasp on is how much your home will really cost you. My husband and I were in a bit of a hurry when we first bought our first home around our one-year anniversary. I figured our mortgage would just be around $200 more than we had been paying before. At the time, the price was worth it in order for us to truly customize our home and lay down roots. We ended up being okay financially, but I wouldn’t recommend that homebuyers rush into a mortgage without carefully breaking down the costs that make up your monthly house payment.
If you’re searching for a home online, you can assess your potential mortgage costs before even speaking to a loan officer. Sites like Zillow break down what you can expect to pay depending on your down payment amount and interest rate. In this example below, you can see that a $259,000 home may cost you around $1,637 per month if you put 20% down and select a 30-year term.
Aside from your mortgage balance and interest, your payment also includes:
- Private Homeowners Insurance or PMI (If you don’t put 20% down)
- Property taxes (amount varies depending on your city)
- Home insurance
- Homeowners Association Fees or an HOA (Not all homeowners pay HOA fees so this just depends on the type of home you buy)
Property taxes in your area can increase or decrease each year so may want to include a buffer in your budget for that.
In addition to your monthly mortgage, there’s also home maintenance to consider. Over time your home will need repairs and you may need to maintain certain areas regularly to prevent more expensive repairs in the future. Aim to budget 1% of the purchase price of your home for repairs and maintenance each year. Add up all your costs before deciding on a home and determine if you can truly afford it.
2. Don’t Go Over Budget on Your House
When we first bought our home, I was surprised to see how much the bank approved us for. It’s common that banks will approve you for way more than you might have expected, but this doesn’t mean you need to borrow the full amount.
A good rule of thumb is to keep your mortgage payment below 25 – 35% of your take-home pay. The less you spend, the more room you’ll have when unexpected expenses come up.
Trying to calculate how much mortgage you can afford is a little bit of a double edged sword. There’s the amount you want to spend, the amount of money a bank will lend you, and of course, the actual amount you can safely afford. Enter the Millennial Homeowner Mortgage Affordability Calculator.
This home Mortgage Affordability Calculator is unlike any other affordability calculator you might find online. This calculator is designed to give you the amount you can safely afford once you have factored in all of your regular expenses. It was created with the consumer in mind, because they know buying a home is a huge financial decision.
Only you know what your budget looks like day-to-day and what your goals are. If the bank says you can afford to borrow more but it doesn’t align with your goals, stick to what you think is best for your family.
One family of 14 is able to live on one-income and already paid off half their mortgage by keeping their house payment reasonable for their budget. Learn more about this family’s sample budget here.
3. Stop Trying to Keep Up With Others
It can be tempting to want to spend more money to keep up with others, but this is often a losing game. You don’t know what someone else’s finances truly look like behind closed doors – not everyone is a blogger sharing their budgeting stories and a behind-the-scenes look of their finances of course!
If you see your friends on social media buying huge houses or going on lavish trips, the best thing to do is be genuinely happy for them then focus on what’s best for your family.
Now let’s talk about when lifestyle inflation can come into play. Spending more money just because you got a raise or an unexpected payment can lead you to become house poor as well. One of my favorite ways to avoid lifestyle inflation is to save the extra or unexpected money we come across instead of spending it mindlessly. Sometimes we find a unique way to save or stop paying for an expense and it frees up more money in the budget.
Recently, we stopped paying for daycare because our youngest is about to enter kindergarten. Instead of spending that $700/month we were paying for daycare, we decided to start saving it instead!
4. Pay Yourself First
Why wait to set aside savings? Try to set money aside as soon as you get paid. That way, you can budget with the rest of your income for the remainder of the money.
Homeowners should have a larger emergency fund because problems with the house can arise at any time. You don’t want those extra costs to leave you with a very tight budget.
Set up automatic savings transfers from your checking account to grow the balance over time. Establishing a few sinking funds is a great way to split up your savings goals and prepare for other expected costs. For example, if you know that the furnace in your home is old and will go out soon, you can set aside money each month to prepare for this expense. Add up all your savings goals (including sinking funds) to come up with the total amount you need to pay yourself first each month.
5. Buy Less House Than You Think You Need
Imagine if you had a huge home but were stuck with a $2,500/month house payment for 30 years. How would you manage having sky-high utility bills and paying for the landscaping and house cleaning work that you didn’t have the time or energy to keep up with? This could take a huge chunk out of your budget causing you to quickly become house poor.
Sometimes less is more. I’m so glad that my husband and I bought a smaller house. At first, I wanted the big home with tons of extra square footage and spare bedrooms.
I quickly realized that I actually loved our smaller home. There is less to clean, less furniture to buy, and the potential for lower utility bills. On top of that, a smaller home could mean a lower mortgage payment.
No one really wants to become house poor. It just happens. Being house poor can limit your ability to save, cause unnecessary stress, and even slow down debt payoff if you wanted to put extra toward your mortgage or other loans.
Getting honest about your budget and breaking down the actual costs you’d incur as a homeowner can help. If you’re willing to take these steps now, you can avoid getting stuck in a situation where you can’t afford your home or your lifestyle.