What is ‘house broke,’ and how can I avoid it?

Being house broke, also known as house poor, is a financial situation where homeowners find themselves struggling to cover their housing expenses, leaving little room for other necessities and savings. In this blog post, we’ll explore what it means to be house poor, the factors contributing to it, and most importantly, how to avoid falling into this financial trap.

Understanding House Broke:

House poor, or house broke, refers to a situation where homeowners allocate an excessively high percentage of their income to housing-related expenses, leaving them with limited resources to meet other financial needs. This condition can result from factors such as:

1. High Mortgage Payments: Often, a substantial mortgage payment is the primary cause of being house broke. Homeowners may commit to larger mortgages than they can comfortably afford.
2. Additional Costs: Apart from mortgage payments, other expenses like property taxes, homeowners association (HOA) fees, utility bills, insurance premiums, and regular maintenance can further strain your finances.

Identifying If You’re House Broke:

Feeling financially constrained is a clear sign of being house broke, but you can use more precise methods to assess your situation:

1. Calculate Your Debt-to-Income Ratio (DTI): DTI measures your monthly debt payments against your income. Lenders usually prefer a front-end DTI (housing costs) of no more than 28% and a back-end DTI (all debts) of 36%. These ratios can help you avoid becoming house poor.
2. Budgeting: Before buying a home, determine how much you can afford to spend each month and stick to it. Applying the 28% rule is a useful guideline.
3. Don’t Over-Finance: Just because you’re preapproved for a certain amount doesn’t mean you have to spend it all. Get a mortgage that aligns with your financial comfort, not just what you qualify for.

How Rising Debt and Diminishing Savings Impact Homeowners:

Rising costs of living, inflation, and stagnant wages have created a challenging environment for many homeowners. This has resulted in less money available for savings and housing-related expenses. Key factors include:

1. Inflation: Inflation has impacted everyday expenses, including housing, and reduced the ability to save for emergencies.
2. Stagnant Wages: A significant portion of the population reports that their wages have not kept up with the increase in household expenses.

Escaping the House Broke Situation:

If you find yourself house broke, consider these options to regain financial stability:

1. Debt Consolidation: Consolidating your debts can help lower your monthly payments, freeing up some funds. However, be mindful of the total amount paid over the life of the debt.
2. Refinance Your Mortgage: If interest rates have fallen or you can qualify for a better rate, refinancing your mortgage can be a smart move. Ensure the cost of the switch is worthwhile.
3. Eliminate Private Mortgage Insurance (PMI): If you have over 20% equity in your home, you can request the suspension of private mortgage insurance payments.
4. Borrow Carefully: Short-term loans or home equity loans can be considered, but use them cautiously as they may complicate things when selling your house.
5. Boost Your Income: Explore opportunities for a second job, selling assets, getting a raise, or finding better-paying positions. Consider side hustles like hosting Airbnb guests.
6. Trim Discretionary Spending: Cut back on non-essential spending, like dining out, travel, and entertainment. Create a detailed budget to identify areas where you can save.

In conclusion

being house broke can be a daunting financial challenge, but with prudent financial planning, budgeting, and responsible borrowing, you can prevent or overcome this situation. Your home should be a source of comfort, not financial strain