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Don’t Be House Poor

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A little while back, I was fully engulfed in the rent or buy debate. I had decided on the rent route for a handful of reasons. I explored the neighborhood and I am back to looking at buying with a realtor. I am not sure where I will end up, but I have to look to make an educated decision.

Becoming House Poor, Or Not

According to “experts,” most people can afford to spend about 30% of their income on housing. I believe that it is important to live below your means, so I am looking at spending closer to 20% of my gross income on a mortgage payment.

House poor is defined as:

A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations like vehicle payments.

There are two main factors that you can control that contribute to your monthly mortgage payment. Those are your down payment and the cost of the home. Insurance, PMI (if you have a down payment below 20%), and taxes are largely beyond your control.

Based on the down payment I have saved up, using the 20% rule, I can afford a house that costs about $220,000. Less the down payment, that makes my monthly mortgage payment about $900-$1,000 per month depending on taxes and insurance.

My current rent is $770 per month (up from $615 due to rent increase and going month to month). At that rate, I have plenty of disposable income. In fact, I use my budget more as a guideline than a strict framework. If my rent goes up due to a mortgage, I will have less disposable income, but as long as I buy within my price range, I would be far from house poor.

Ways to Avoid Being House Poor

Don’t Buy a House You Can’t Afford

I did the math to see what I can afford. The easiest way to avoid this situation is to avoid it in the first place. Think through your finances, job security, income, expenses, and only buy what you can really afford.

Get a Roommate

I am looking at two bedroom homes to share with a friend. I would be the owner/landlord, and he would rent a room from me. If you are doing this with a friend, set clear guidelines and sign a lease agreement beforehand.

If you can get an extra $400 or more (depending on your cost) toward your payment per month, you can either pay off your mortgage early or save on your cash flow.

Ever Been House Poor?

Have you been in this situation before? Know someone who has? Please share the story, and what happened, in the comments.

Image by Images_of_Money.

Student Loan #1 – Paid off! #Winning

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Yes, I included a Charlie Sheen Twitter reference in the post title. But when you are a personal finance #warlock with #tigersblood, it is only appropriate.

Why am I so egotistical on my financial savvy today? Why is today different from all other days? They say a picture is worth a thousand words, but in this case it is worth more like twenty thousand dollars.

Yes, loan number one is now paid off!

How and Why I Did It

Over the last six weeks, I have been doing well financially. I received a large reimbursement from a flex spending account for $3,400 from my eye surgery that I paid for out of pocket in advance, I had a few advertising sales come through, and I got my annual bonus at work.

I decided against buying a home right now, so I had extra funds to burn. Rather than actually burn them, I put the cash to good use and paid off the last $3,500 in my smaller student loan.

This saves me interest payments every month and opens up $65 in cash flow (minimum payment) if my financial situation were to change dramatically.

Loan Number #2

I have $7,735.81 left in total debt. That is all a 6.8% student loan with a monthly payment of $92.32. My goal was to pay off my student loans completely within two years of graduating. I am just over the one year mark and I am on track.

I might not pay this one quite as quickly as the original goal because my priorities have changed. I am trying to preserve capital and save up so I can make a good down payment on a home in the next year or two.

If you are looking to pay down your student loans, you can probably relate to one reader that wrote in to ask for help on a payment plan. (Lots of good tips in the comments on that post too!)

Have you conquered student loan debt? Are you in the process? Please share what you learned, and what you need help with, in the comments.