Are you currently in the market for buying a house? Houses are cheaper than they used to be, but they are still a huge expense. In fact, for many of us, buying a house is the most money we’ll ever spend on one single item! Your house purchase can make or break you for the next 30 years of your life.
My Friends Trapped Themselves
I am a moderate sports enthusiast. I like to watch sports on television and I also like to get out in the sun and compete with my friends as well. For the most part, I am a pretty mild guy, but there are times when I get extremely upset – and that’s when I beat myself. If you play any type of sport, you know what I mean. It’s missing the goal when you have a wide open shot, accidentally dribbling the ball off your foot on a breakaway layup, or flubbing that three foot putt that would give you the best score you’ve ever had. There is no one else that’s responsible for your error except you.
The same goes for a house purchase. My friends (husband and wife) felt like they were ready to move out of their crummy apartment and into a house of their own. They were so excited! And, of course the first thing you do is head to the bank to see how much of a loan you can qualify for. Since they both worked, they were able to get pre-qualified for a $225,000 loan. Not too shabby. Being relatively wise, they decided not to max out their borrowing and started to look at houses that were valued at $175,000. I commended them for that, but then they made a mistake.
That $175k house was ok, but there was one up the road for $185k that they figure they may as well look at too. It was a little nicer than the last one and it had an extra bedroom. This would be great if they started their family soon. Then they started wondering what kind of house they could get for $200k. As you may have guessed, in the end they ended up using all of their $225,000 loan. They both love the house, but they just unknowingly trapped themselves.
They Are Now House Poor
Because of this “dream house”, my friends have been house poor for the past five years and will likely continue to be house poor until their 30 year home loan is paid off. So before I get too far ahead of myself, what do I mean by “house poor”? This basically means they they took on so much debt to buy a house that they can no longer save any money for the future. At most, they have an extra $100 per month after their necessary expenses and payments. But they like to have fun too, so they go out to eat a couple of times during the month, which means they have nothing left when the month is over.
They can’t save up any money, which means that they take on debt for everything: dentist bills, new car payments, furniture, appliances, and the list goes on and on. If anything, they are actually going backwards. Sure, they are slowly building equity in their home (about $2,000 a year…), but without any cash flow, they are taking on mountains of extra debt and have no way to pay it off! My friend didn’t realize this until about a year after the home purchase. He was living from paycheck to paycheck and told me, “if me or my wife ever lose our job, we’ll be so screwed…” Unfortunately, this is not uncommon. So what are you to do?
Before You Buy Your House
Before you make your house purchase, calculate how much your monthly payment would be (there are a million sites out there that can do this for you). Now, add on your monthly property taxes and your home insurance. Do you feel like you can afford that amount per month? As a rule of thumb, as long as you don’t have any other large debts, your house payment shouldn’t be more than 25% of the largest monthly salary in the house. So, if you make $2,500 a month and your spouse earns $2,000 a month, you should only allow yourself to spend 1/4 of $2,500 on your home loan each month (which equates to $625). When I first looked at that number, I thought it was impossible. But, I found a great fixer-upper house and now that the repairs have been made, I feel like I’m living in luxury. Not only does my house look nice inside and out, I also never have to worry about making my very reasonable house payment.
What If You’re Already House Poor?
There are some of you that have already bought the house at the top of your range. What are your options? Well, you basically have three options. You can either reduce your other expenses, make more money, or you can sell that house that’s making you poor. Many people don’t like to sell their house for a loss, but if it would mean a stress-free life for the next 30 years, I’d say that it would definitely be worth it. Plus, think of all the interest payments you’ll be saving!
Do you know of anyone that’s house poor?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.