Owning a home is a part of the American dream for many. A home is the largest purchase most of us will ever make, and it’s such a large purchase we might even pay for over fifteen or thirty years. But if you get yourself in a bigger mortgage than you can handle, you might become house poor.
We have all heard of people who own big, beautiful homes but struggle to buy furniture or go on vacation, working overtime just to pay their mortgage. As sad as it is, becoming house poor is a common problem faced by many who bought too much house for their income.
What does it mean to be house poor?
The term “house poor” describes a person who spends such a high percentage of their income on their mortgage, home maintenance, insurance, and utilities that they struggle to meet all of their other financial needs.
Many mortgage lenders will lend so much to borrowers that the monthly mortgage payment equals almost 50% of their take-home pay. This might allow borrowers to buy a bigger, more beautiful house. Still, after the mortgage and all other living expenses are paid, there’s nothing left to put into savings or to pay for emergencies as they arise.
There are many online calculators to help you decide how much house payment you can afford. By entering in the purchase price, your down payment, and the interest rate, you can get a good idea of what your mortgage payment might be.
However, there are many expenses to owning a home other than the mortgage payment.
You’re required to hold homeowner’s insurance to protect your home. Besides covering your home itself, it also will cover the items in your home as well as possibly provide some protection in the event that a guest is hurt on your property.
Private Mortgage Insurance
Private Mortgage Insurance, or PMI, is insurance that most lenders require if you don’t have a 20% down payment to put towards your house. If you default on your loan and the lender isn’t able to cover their expenses by selling your home, the PMI will help them make up the difference.
PMI is typically between .5% and 2% of your loan amount and will be included with your house payment. You’ll keep paying it until you have 20% equity in your home. Adding PMI to your mortgage payment could increase your payment quite a bit: if you buy a $100,000 home with $10,000 down and your PMI rate is 1%, that will add an additional $75 per month to your house payment.
If you’re moving from an apartment to a home, you might not realize how much it costs to heat and cool a home. A house of your own might also mean additional expenses that you didn’t have while renting an apartment. These expenses may include paying for trash, water, and home owner’s association fees. Besides just paying for the home, if you have a yard, you may be buying items such as a lawnmower or other yard work tools or paying someone to do yard work for you.
Many states or municipalities have property taxes, which are used to pay for everything from public schools to street repairs. The amount of your tax will most likely be included with your mortgage payment and put in an escrow account.
How much house can you afford without becoming house poor?
The mortgage payment is only one of the many costs of owning your own home. The other expenses can add up quickly. While it is tempting to spend the maximum mortgage you’re approved for, buying conservatively will allow you to live comfortably and continue saving money.
A good rule of thumb is to plan to spend about 25% of your take-home pay on your mortgage payment. This gives you room to pay for other expenses associated with owning a home without causing undue stress.
Research before you buy
Before you purchase your home, you can do a few things to keep costs down and set a realistic expectation of what homeownership will cost you. Knowing these details can help you create a budget to determine what homeownership will cost you.
- Save a 20% down payment to avoid PMI.
- Contact utility companies to get an idea of the monthly costs for the house you want to buy.
- Check the property tax rates, and be sure to include them when you calculate your payments.
- Check to see if the home is in a flood plain, which may require flood insurance.
- Ask your realtor if the home is in a Home Owner’s Association, and if so, what the fees are.
Owning the home of your dreams can bring you a great amount of joy, but overspending can cause you more anxiety and headache. Carefully setting a budget and buying within your means will ensure that your home is a blessing rather than a burden.
If your budget doesn’t allow you to buy the home you’d like, consider waiting a little longer. It’s better to be patient and make a well-informed choice than to saddle yourself with significant expenses that may be a burden for years.