Andy Hill discovered he was poor soon after buying his first home in 2004.
When Hill downsized the 1,200-square-foot home in Royal Oak, Michigan, a suburb of Detroit by 10%, he was surprised to learn he had to pay private mortgage insurance, which was initially $ 158 per month.
Heating the poorly insulated house was also more expensive than Hill realized. To make ends meet, the 22-year-old had to take out a home equity line of credit.
“I quickly found that I was spending at least half of my small income of $ 30,000 at the time to become a homeowner,” he says. “I became the owner of the house, as opposed to me owning the house.”
While buying a home can be a good investment, it can also become a financial burden. Here’s how to think about your housing budget so that it doesn’t happen to you.
What does it mean to be poor at home?
A poor person spends so much of their income on homeownership – like monthly mortgage payments, property taxes, insurance, and maintenance – that very little is left in the budget for other major expenses.
Being poor in a house can limit your ability to build a retirement or other savings, to pay off your debts, to travel or to enjoy life.
“I ran out of money to hang out with my friends, eat out, or enjoy the time as a 20-year-old,” says Hill. “I was selling my CDs and DVDs on eBay, trying to pay the heating bill.”
In fact, 28% of recent homebuyers say paying their monthly mortgage payments will be one of the biggest financial stressors over the next two years, according to the UKTN Buyer Report 2021.
Budget before buying
Before buying a home, it’s important to determine how much of the home you can easily afford, which may be different from the maximum mortgage amount you can get approved for.
“Home accessibility calculators are definitely a good place to start in helping determine your housing budget, ”says Jake Northrup, a certified financial planner and founder of Experience Your Wealth in Bristol, Rhode Island. “However, they also require that you have a good understanding of your cash flow today – what income is coming in, what expenses are spent and how much you are saving.”
A rule of thumb is that you shouldn’t be spending more than 28% of your gross monthly income on housing costs and 36% on total debt, including your mortgage, credit cards, and other loans.
While the 28/36 rule is a good guideline, says Mark Avallone, a certified financial planner at Potomac Wealth Advisors in Maryland, everyone’s situation is different and the rule does not take into account the need to leave room. in your budget for things. such as furniture, as well as maintenance and repairs.
Schedule maintenance and upgrades
The cost of unscheduled home repairs and ongoing maintenance can take first time buyers, in particular, by surprise. Even a home in great shape on the day it closes will inevitably need major repairs over the years.
Hill realized after moving into his new home that the roof needed to be replaced and the HVAC system needed some work.
UKTN’s 2021 Homebuyer Report found that 41% of people who bought a home in the past 12 months say their biggest financial worries over the next two years will be repairs and maintenance of their house.
Saving 1% of the property’s value is a good starting point for annual maintenance expenses, says Ibijoke Akinbowale, director of the Housing Counseling Network at the National Community Reinvestment Coalition.
But, she notes, you may need to increase the value of the property by as much as 2% depending on the age and condition of your home, the repairs you’ve already made and the size of the property. life expectancy of housing components such as the roof or the furnace.
Tips to avoid being poor at home
Even if you plan your home correctly, it is possible to become poor if a job loss or medical emergency prevents you from paying your bills.
Here are the steps you can take before and after buying a home to avoid spending too much of your income on homeownership:
Make a larger down payment. If you deposit more money, it will lower your monthly mortgage bill. While you can eliminate private mortgage insurance with a 20% down payment, make sure the down payment you choose doesn’t leave you with no savings or unable to manage your monthly bills.
Start an emergency housing fund. Make sure you have enough room in your housing budget to continue building your emergency fund. Setting aside money each month specifically for housing expenses can provide you with a cushion for the unexpected.
Buy a starter house. Your first home doesn’t have to be the home you live in forever. A starter home is a single-family home, condominium, or townhouse that is smaller and generally more affordable for first-time home buyers.
Rent a space or sell your house. In 2006, Hill says, he had three roommates who almost covered the cost of his mortgage. He eventually sold the house for no profit.
In 2013, when Hill decided to buy a house with his wife, he knew he wanted to do things differently. The couple bought their “dream house” after living so modestly for three years that they were able to pay off their debts and save a 40% down payment. Despite this, they took out a smaller mortgage than they could have claimed.
Hill’s experiences with homeownership inspired him to start the MarriageKidsandMoney.com podcast and blog.
“When you’re absolutely sure you want to live somewhere for the long haul, buying a home with the right down payment and an understanding of the real costs of homeownership can be a great experience,” he says. “I found this with my second round of home ownership.”