Have you ever heard the term House Poor before?
It simply means that you “own” a wonderful house, but you don’t have much cash left over for anything else.
I put own in parentheses because we never really fully own our homes until the mortgage is paid off. If you own a home that is paid off then your situation might be better defined as “house rich.”
But for the rest of us, until that times comes, we tend to be “house poor”.
First time home buyers are at the biggest risk for being house poor. Usually first time home buyers are no where near their peak earning potential, and their financial future is very uncertain. There are usually many unanswered questions in life such as, “Will this be the area we will live in for at least 5-10 more years of our life?”, and “How many children will we have, if any?”, and even, “How long will I stay in this job or career?”
All this uncertainty about the future tends to cause uncertainty in the proper house to buy.
So what do people end up doing? They end up buying the maximum house they can afford hoping (assuming) that they will eventually grow into it. (Larger income, more kids, house prices will appreciate, etc.)
Any person looking from the outside in will realize that buying on future assumptions is usually a bad idea. But people tend to want to buy the best they can afford and hope for the best. Unfortunately things usually don’t work out that way.
People get laid off, they have kids, careers move them to other states or other countries even. The raises they assumed were coming never come. And I am sure you can come up with many more of the unexpected life events that occur.
It doesn’t help that we are “sold” the biggest house we can possibly get into. Real estate agents and loan brokers are typically paid a percentage of the sale. They have no incentive to sell you are smaller, less expensive house. They have every incentive to sell you the most expensive house legally possible.
And as we witnessed in the past decade, it became possible to sell people houses they couldn’t legitimately afford because the responsibility for the loan disappeared in a huge cloud of derivatives. Banks stopped caring who they loaned to, for whatever ridiculous amount, because they were just going to package and sell off the group of mortgages to the highest bidder on the open market.
The key for you as an individual is to not buy into the ideas that the real estate market is selling.
When a real estate agent says you can afford a $300,000 house, buy a $150,000 house. If they say you can afford a $200,000 house then buy a $100,000 house. If they say you can afford a $150,000 house, then buy the $75,000 house.
You get the idea. If you buy half the house the real estate agent says you can supposedly afford then you should be in the clear. You will actually avoid being house poor, AND you can enjoy using your money elsewhere for more important things. AND if you are a future minded individual, you might just take that extra money you would have spent on the bigger house, and pay off your less expensive house in 10-15 years instead of the typical 30 or more years that most people do.
Don’t underestimate the financial power behind having a paid off house. It can open up a world of opportunity, especially in your later years.
This is our 28th challenge in The Personal Finance Challenge Series…
Originally posted 2011-10-17 11:12:42. Republished by Blog Post Promoter