First, how do you know if you are house poor? How much is too much to spend on your home? In general, you should not spend more than 30 percent of your gross pay on your home. This includes all of your expenses like rent or mortgage, utilities, homeowners insurance and even maintenance. So, if you make 6000 dollars a month, you should spend no more than 1800 dollars a month on your home and related expenses.
The problem with spending more than 30 percent of your income on your home is that it takes away from other parts of your budget, namely savings. It can also have a big impact on other parts of your budget and keep you from enjoying your life.
If you are house broke already, let’s take a look at how to get out of it and then how to prevent being house broke in the first place.
Help I Am House Broke
So, you are house broke and you know it. You spend way more than 30 percent of your income on your home and it is becoming a problem. But how did you get there? Here are some possibilities.
You Bought Too Much House
We can easily get into trouble right from the start by buying too much house. Sometimes you get approved for more than you can actually afford and can get in over your head. You can also buy a house and not realize how much money it would take to maintain and run. Older houses, for example, need a lot of maintenance and are expensive to heat and cool.
You Lost Income
Your income does not always go up, sometimes things happen and your income goes down. If that has happened to you, that reasonable housing expense might have all of a sudden jumped to over 50 percent of your income.
Your Mortgage Jumped
Sometimes mortgage monthly payments can go up dramatically. This can happen if you had an adjustable mortgage and the first term expired. An increase in interest can make your payment skyrocket. Another way for a mortgage to go up is if the area is appreciating much faster than you anticipated. Rising property taxes can substantially increase a payment.
Whatever the case, if you are house poor, you are in a situation that you need to get out of.
How Do I Stop Being House Broke?
If you are paying 50 percent or more of your gross income on your home, you are in a situation that you need to get out of. You are essentially taking the portion of the money that you should be saving and spending it on your home. So, let’s look at some ways to get out of this situation.
Refinancing can potentially lower your mortgage in several ways. If you have a high interest rate and your credit has improved or rates have dropped, you can lower your payment. If you can stretch out your loan for a longer term, you can lower your payment. If you have enough equity to refinance without mortgage insurance, you can lower your payment. There are a lot of ways that refinancing can potentially benefit you. COnsult a lender for possibilities.
If refinancing does not work, your best option might just be to sell. It could just be that you bought too much home and you really can not afford it. Sell your home before it gets the better of you and perhaps you can still walk away with some equity and a second chance on a more reasonable home. You can then take this equity and put it down on a home that fits better into your budget.
One last way to lower your housing expenses to a reasonable level is to lower the accompanying expenses. Making your home more efficient and investing in a newer heating and air conditioning system could lower your utility bills. This could be several hundred dollars a month on an older home. Also consider shopping for more affordable home owners insurance, looking for property tax exemptions and doing your own maintenance.
How Do I Prevent Being House Broke?
The way to prevent being house broke is to be reasonable and to do your research before you buy or rent a new home. Don’t let yourself be tempted to buy more than you need or can realistically afford.
Set Your Budget
First, set your budget at 30 percent of your household gross income. Remember, this amount will include all expenses related to your home. If you make 5000 dollars, before taxes, your budget is 1500 dollars for housing in a month.
Calculate Your Expenses
Next, add up all of your expenses including utilities and maintenance.
Electricity is one of the biggest expenses and will vary depending on your local rates. The average home uses about 900 KWH per month and an older home could use double this. Get your local rates and estimate your monthly electricity expense.
Other expenses include renters insurance, HOA fees, lawn care, water, trash service and of course routine maintenance.
Do The Math
Subtract your expected expenses from your housing allotment of 30 percent to get your maximum rent or mortgage payment. So, if you make 5000 dollars a month, that allotment is 1500 dollars. If you expect home expenses to be 300 dollars a month, you should spend no more than 1200 dollars a month on your rent or mortgage payment.
Tip, don’t fudge the numbers to make a home seem affordable. Expenses are almost always more than what you budget for.