What to Do After You Realize That You Are “poor”
Buying a home is a complex and emotional process, and we don’t always make perfect decisions once we’ve determined that a particular property is our dream home. But even if you carefully treat your home as an asset and an investment, it will be difficult for you to pay off the down payment and even more difficult to understand how much home you can really afford . And here’s the real trick: even if you’re careful with your money, you can still end up being “poor.” Being poor means that the cost of owning and maintaining a home eats up most or all of your income, leaving you with very little to cover other bills or aspects of your life.
You may have calculated these costs before buying and decided that you are able to meet your financial obligations, but poverty at home can sneak up on you unnoticed. Buyers tend to focus on paying off the mortgage, but there are dozens of other costs associated with owning a home, from property taxes and insurance to higher utility bills (due to the larger footprint), buying new furniture and unexpected bills for repair. Some of these costs can also rise unexpectedly, and if your home loan has an adjustable interest rate, it can skyrocket. You can also become poor if other areas of your life are also going in the wrong direction – if you get laid off or go through a major health crisis that drains your bank account, you may suddenly find yourself struggling to pay your mortgage and other payments. house bills. Here’s what to do about it.
How to know if you are really poor at home
Math is a crystal ball that can show if you are poor or in danger of becoming poor. The US government recommends that your total debt burden (also known as your debt-to-income ratio [DTI]) should not exceed 36%. This means that you should not spend more than 36% of your gross income on debt servicing, including mortgages. For example, if you make $120,000 a year, your monthly gross income is $10,000, so your debt payments (including credit cards, mortgages, and everything else) should not exceed $3,600. Keeping track of your DTI after purchasing a home can give you an early warning sign that you are at risk of becoming (or have become) a poor house.
So let’s say you’re tracking your DTI and after a few rough months you realize you’ve reached the American nightmare and become a pauper. What can you do about it?
Increase income, reduce costs
First, let’s get the obvious out of the way: “Poor house” is a fancy way of saying “poor,” so your first task is to change the conversation about money. A second job or part-time job to increase your income will help (at the cost of your sanity and enjoyment of life, of course) as well as cut your costs down as much as you can handle. You may also consider selling some items if you have something of value.
It is worth considering whether or not to cling to the house. If you can sell it and pay off the rest of your mortgage, it might be better to admit defeat even if you take a hit and lose some of your capital. It’s easy to become emotionally attached to a property, especially if it’s a dream home that you’ve been working on for years. But if you’re already home poor, there’s a risk that you’ll spend a few miserable years working and saving and still lose your home, perhaps due to a foreclosure situation.
It’s a different scenario if you’ve been deep in mortgages for years and have a ton of net worth. The key here is to sit with the numbers and have a clear plan for covering your housing costs, as well as coping with the emotional cost of spending most of your energy paying bills.
A possible alternative to increasing income is debt consolidation. Consolidating multiple debts into one big chunk can reduce the total monthly payments you owe and possibly also reduce the total interest you pay on multiple debts.
Another cost-cutting strategy is to waive your private mortgage insurance (PMI) payments if you have them. Usually the PMI disappears when you reach 22% of the equity in the property, but it sometimes takes your lender time to realize that this has happened, especially if it is due to a rise in the value of the property, giving you more equity. If you think your home has appreciated enough to give you that magical 22%, it could be worth your while to appraise it if you can stop making PMI payments on top of your mortgage.
Monetize home
If you’ve done the budgeting work to increase income and/or cut costs and you’re still struggling, you can try to find ways to turn your property into a positive income generator. It can be old school, like getting one or two roommates to occupy your spare bedrooms and pay you rent (not to mention split your utility bills), or you can rent a house part-time through a short-term rental platform like Airbnb.
Of course, most of us would like to think that we are forever leaving annoying roommates and chasing people for their share of the Internet bill when we buy a house, so think carefully about whether you should go down this path. Renting in any form can also put a lot of wear and tear on your home as more people use the infrastructure and some of them just don’t care as much about the property as you do because they don’t need to. I own it.
Refinance your debt
What a lot of people don’t realize is that if you have what’s known as a regular mortgage , you can refinance that crap just about any time you want (if you have an FHA loan, a “big” loan, a VA loan, or a loan through the Department of Agriculture). economy, it’s a bit more complicated ). Refinancing your mortgage essentially changes your current loan to a new one. If interest rates have dropped since you bought your home, you can often get a much better rate. You can also extend or shorten the term, which can have a huge impact on your monthly payments. And if you have a lot of capital, sometimes you can cash out a lot of it, which can help with immediate expenses.
The rule of thumb here is pretty simple: if you can get an interest rate at least 1 point lower than your current rate, it’s probably worth your while. But there are other considerations as well. Even if the rate remains essentially the same, extending the term of the loan (for example, from 15 to 30 years) can make your monthly expenses more manageable, even if you deal with them for a longer period of time. But! There are also many fees associated with refinancing – up to 6% of the loan balance . Know what those fees will be before you pull the trigger or you could end up in bad house territory again.
nuclear option
If the conditions that make your home poor are likely to be permanent, or if the idea of reorganizing every aspect of your life to afford your home tires you, you can always consider the nuclear option: sell your home. Sometimes it’s better to just admit that mistakes were made. Do the math: can you plausibly pay off the mortgage balance from the sale? Can you afford the realtor’s fees or other expenses (such as necessary repairs)? Will you pay capital gains tax if you sell (especially if you haven’t owned the house for more than 2 years)?
Selling a property can give you the opportunity to buy a smaller, less expensive house, or at least rent a place for a much lower monthly cost. It can be an emotional decision—it can feel like defeat or failure—but when the other option is a few miserable months or years followed by a foreclosure or similar financial disaster, it can make the most sense.