How can I avoid being house poor?

A healthy budget is all about balance. Our income goes towards our needs and wants – from paying mortgage, bills and buying groceries, to enjoying lifestyle perks like entertainment or fine dining. But when one expense eats up the bulk of your income, the rest of the budget may become strained, putting additional financial pressure on the home owner. Here’s how to avoid being house poor. What does house poor mean?

“House poor” can refer to anyone who is using more than 30-50% of their income towards their mortgage, property taxes, and home maintenance. This affects their ability to pay other debts, living expenses, or everyday costs. Someone who is house poor might still be able to afford basic living costs, but might not be able to maintain the lifestyle they’re used to.

Maybe your income once gave you the freedom to travel, go out for dinner, or send your kids to summer camp, but now your home payments mean you have to cut corners. Some people casually refer to this cost cutting as being “house poor” as well.

How do people become house poor? When homeowners are house poor it can be a result of several different reasons including poor financial planning, job loss, health issues, legal costs, and other factors. Here are some examples of poor financial planning: Choosing to buy a home that requires the largest mortgage one qualified for. With rising home prices, this may be tempting, resulting in mortgage and property tax bills that eat up a very large part of your monthly income.

Rising interest rates: Variable-rate mortgages will be affected soon after the rate increases, while fixed-term mortgages will be affected when it’s time to renew.

Increasing property taxes.

Tying up all of your cash into a down payment and not having an emergency fund for unexpected home repairs or if your income drops.

If you lose your job, or your income drops due to illness, you can also see yourself becoming house poor. An unplanned drop in income or a significant rise in any costs can disturb a delicately balanced budget. This is why it’s wise to leave wide margins in your financial planning, with a cushion in case of unplanned events.