One of the most common financial problems facing Americans today is "owning too much home." And by owning, I mean in the process of owning. In other words, securing a mortgage for a house in which you can't afford to live. This is a very serious problem. If this happens to be your problem, then you need to address it ASAP.
What sort of problems can "too much house" cause?
Well, lots. High utility costs, high maintenance costs, and high stress levels to name a few. But low housing liquidity and high foreclosure risks are what would keep me up at night. Housing liquidity is used to describe how easy it would be for you to quickly sell your home at an "acceptable" price. The lower the liquidity, the harder it would be to get rid of your house in an "emergency" situation (job transfer, budget constraints, etc). Unfortunately as you will see below, some of the same signs that illuminate the fact that you can't afford your house, also prevent you from selling your house in a prompt manner.
Foreclosure risk is real for those that can't afford the home in which they live.
- You have no equity- How much of your house do you own? Your answer will determine whether or not you are in a "healthy" housing situation. Equity, of course, is the amount of ownership that you have in something (in this instance, your home). Do you have less than 5% ownership of your home? If so, then you are in too much home. What? The market fell and ate up your ownership? Yes, that stinks, but you still are in too much home. Low equity = home selling difficulty. Remember our brief discussion about housing liquidity? Home equity can prevent you from having housing liquidity issues. Low equity isn't the end of the world, but fire is falling from the sky if you have low equity combined with one or two of the following signs.
- Your payment is 40% of your monthly income- According to Personal Finance Expert Peter Dunn, the maximum amount of your monthly income that should be dedicated to your mortgage payment is 25%. It is quite possible that if your mortgage payment ranges up to 30-35% of your income, you will still be alright. But if 40% of your household income goes to pay your mortgage, then you could be in really big trouble. This isn't always the case, but it is often the case. The more you spend on housing, then less you can spend on...everything else! This means that you most likely can't save money, can't pay off debt, and can't go on vacation. It is quite common for people that have a major debt issue to mistake a too much house problem for a debt problem. Having a high housing cost percentage leaves you very little room for error.
- You can't afford to keep up with yard and house maintenance- Haven't mulched in 2 years? Can't afford to paint your house? That's a sign that you can't afford the house in which you live. If you have to go into debt in order to perform the most basic of home maintenance, then you can't afford your home. The worst part is that neglecting upkeep will only make your too much house problem worse. Your property value will suffer from your lack of attention. This increases housing liquidity concerns.
- You have unfurnished rooms- What's the point of having a room that you don't use? Sure, guest bed rooms and other such rooms occasionally aren't used. I'm not suggesting that you buy furniture that you can't afford, it's just that you might be in over your head. There is a ritzy section of the city in which I live that is famous for having gigantic homes with no furniture. You don't have to have a perfectly decorated home, but there is something incredibly odd about buying a $750,000 and then not having enough cash flow to furnish the damn thing. Right?
- You struggle to afford property tax increases- I believe that it was Henry David Thoreau who once said, "No, I'm not going to pay property taxes." Okay, he may not have said that...actually he probably did...but anyway. Sorry Hank, no one likes paying property taxes. No one. Property taxes will consistently increase either through increased tax rates or increased property values. Not being able to afford this increase is a major sign that you are in trouble.
If you are "guilty" of at least 3 of these problems, then you have a serious problem. Not being able to afford your current home should not be taken lightly. That stress you are feeling...yeah, it's real. This problem will not solve itself. But acting in haste will only worsen your problem. I do think that you need to get some professionals involved. You should contact a licensed and trusted realtor to give you an estimate of what your home is worth. You need information. Whether you sell your home or not, you need to know where you stand. The solution very well may be that you should sell your home. This is a terribly tough decision, but it could save the rest of your financial life.
So you aren't going to sell you home, now what? You MUST turn to your budget. Don't know how much you should spend on stuff? Then use this ideal budget. If you can't afford your house, then you are likely committing too much of your household income to your mortgage payment. This means that you either need to make more money or spend less money. Spoiler alert for the rest of your financial life: those are always the two options. In some cases you might want to consider getting an additional job. This should help you temporarily raise your income so that you can take another more permanent course of action (such as selling your house).
If you do sell your house, then you are unlikely to have a ton of equity for a downpayment on another house. Take this as a sign from God. Don't buy another house. Rent. Renting is not second place. Renting is one of the smartest financial decisions that you can make. The crazy thing is that you can probably rent a house in the same neighborhood in which you currently live...for less than what you are currently paying for your mortgage.
I can't emphasize my final point enough: time will not solve this problem. Only three things solve the too much house problem: spending less money, making more money, or selling your house. And in most instances, you need to do all three. Don't be embarrassed. Be empowered. You are about to take control of your out-of-control financial life. And don't forget, I'm here to help.
