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3 Ways to Become House Poor Fast

The term "house poor" describes the situation in which a home is so expensive that owning it makes it difficult to afford other things in life. If, for example, a homebuyer's after-tax household income is $4,000 per month and their monthly mortgage payment is $2,000, there might not be a lot of money left over after basic necessities such as car payments, groceries, and utilities.

Of course, the quickest way to become house poor is to buy the most expensive house you can afford. When homebuyers purchase a home at the very limits of what they are qualified by a bank to borrow, they put themselves at risk of being house poor. That scenario is obvious.

But there are some other ways to become house poor even if you don't buy a home at the top of your price range. Here are a few:

Assume your income will always go up

In the past decade or so, average wages in the United States have been flat when compared to inflation. And if you sign up for a mortgage that makes your monthly budget too tight to put money into savings each month, assuming your income will continue to rise, you could be in for a bad time.

Most Americans don't have enough savings to cover unexpected costs, such as repairs or medical emergencies. If you're counting on raises at work, and they don't come, that high mortgage payment could be the difference between having a rainy-day fund or not. A job loss in this example could be financially catastrophic.

Over-improve the home

Over time, every homeowner will have projects they want to do. But doing major renovations or even a lot of smaller, cosmetic projects can add up quickly. If you finance those projects with a home equity line of credit, you're paying even more per month than you were when you bought the house. If you take it out of savings, then you've turned liquid savings into illiquid home equity that doesn't change your monthly obligations.

And the risk is never being able to recover the investment. If you buy a $200,000 house in a $200,000 neighborhood, for example, and finish the basement, put in a pool and patio, maybe remodel the kitchen, there's a chance you won't ever recoup all your costs if you can't sell your house for much more than the $200,000 other homes in the neighborhood are going for.

Don't shop around

This doesn't mean shop around for a new home, it means don't shop around to keep costs down on the one you have.

If real estate taxes and insurance are built into your payment, chances are you'll see that monthly payment go up over time. Insurance premiums rise, and homeowners should get quotes from other companies every couple of years or so. Taxes are not as simple, but if you receive a reassessment that prices your home unfairly, you can and should challenge it. Many people don't do the legwork required, and they allow their property taxes to go up without a fight.

It's also a good idea to shop for interest rates on refinancing a mortgage when rates are low. It can feel like a pain to refinance a mortgage, and cost some money up front, but if your monthly budget is tight and you can knock off even $100 of it each month, you'll be in less danger of being house poor.

The old real estate adage is "Buy as much house as you can afford," but that's not the approach for everybody. Buying under your max price point will help you avoid becoming house poor, but keep in mind there are other, less-obvious factors in play, too.

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