Buying that Beautiful Home Could Make you “House Rich and Cash Poor”



Becoming house rich and cash poor is an uncomfortable, financially dangerous position. It means your financial worth is tied up in your house, leaving very little in your bank account.

It also means that should a financial crisis occur, you might not have the liquid assets to weather the storm.

What does “House rich and cash poor” look like?

  • You have less than six months’ worth of cash tucked away to cover monthly expenses should you become ill or injured.
  • You have no reserves put away for home maintenance and repairs.
  • Your ongoing monthly expenses exceed 40% of your monthly income. (30% or less should be the goal.)
  • The equity in your home is more than 80% of your total net worth.

Being house rich and cash poor can also affect the quality of your life.

When all of your energies go toward paying the monthly mortgage payment and staying current with taxes, HOA fees, utility bills, etc. it takes the fun out of living in a nice home.

Living in a beautiful home is wonderful, but most people enjoy getting away for a vacation now and then. If all your money is tied up in paying for the house, that’s probably not an option. Even a concert, a ball game, or dinner at a nice restaurant may be out of your reach.

Even though it isn’t wise, many homeowners today are in this situation.

Think of the first time buyers who saved money for a down payment, then hurried to purchase a home as soon as they had the 5% to 20% their lender required. They had nothing left in the bank when the purchase closed.

Some have traded up to their dream home. They built good equity in their first home, sold it, then spent all the cash as the down payment on the new home. Again, they had nothing left for unexpected expenses.

In the first scenario, the buyers have simply jumped the gun. They should have waited until they had enough put away to cover the down payment and a reserve fund.

The move-up buyers had the cash and chose to put all of it down on the house – again leaving themselves in a shaky financial position.

How you can avoid becoming House Rich and Cash Poor.

First, understand your own finances before you consider buying a home. Put your numbers down on paper so you can see them clearly.

  • The cash you have now
  • Your monthly income
  • Your monthly fixed expenses

But don’t stop there. In addition to what you must spend each month, consider what you WANT to spend each month or each year.

Your lender will look at your income and expenses to determine how much you can afford as a monthly payment, but you should not take that number and run with it. Instead you should calculate how much you want to spend on entertainment, recreation, eating out, and even that morning coffee. Then you should consider vacations. Is it important to you to visit out-of-state family each year? Will you feel deprived if you can’t go to the mountains or the beach for a week every summer?

Put those dollars in your proposed budget because they are important. If owning your new home prevents you from enjoying your favorite activities, you won’t love it for long.

You might also consider purchasing a home warranty. This could add approximately $50 per month to your expenses, but would well be worth it if it saves you from a sudden repair expense in the thousands. You may even be able to get the seller to pay for the first year. Discuss this with your agent and do compare warranty offerings before choosing one.

Before you begin to shop for that new home: Talk to your lender about how much you can spend when the “want to” expenses are added to the “have to” expenses.

Keep saving… Putting one year’s worth of recurring monthly expenses in the bank will give you peace of mind.

When you’re ready to talk with a lender, call the Mike Clover Group at Homewood Mortgage. We’ll be happy to get you pre-approved for a home loan – and happy to help you decide not just what you can spend on a house, but what you should spend, based on your preferred lifestyle.

We’re known for fast, friendly service, trouble-free closings, and the lowest rates and fees available anywhere in Texas.


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