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Mortgages

How to avoid being 'house-rich, cash-poor' by selecting the right mortgage for your budget

Being house-poor leaves you financially vulnerable — here's how you can prevent it.

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Sturti | E+ | Getty Images

Owning a home doesn't just put a roof over your head — it can also put money in your pocket (at least on paper). According to a 2022 report from the National Association of Realtors, single-family homeowners accumulated an average of $225,000 in wealth from their homes during a 10-year period.

But what if the equity you hold in your most valuable asset doesn't make you feel any richer when you're looking at your bank accounts?

If that sounds familiar, you might be "house-rich, cash-poor" (otherwise known as "house-poor"), meaning you have equity in your home but not enough liquid assets for saving and spending. CNBC Select breaks down how to avoid becoming house-poor — as well as what to do if it's already too late.

How to avoid becoming house-poor

The best protection against becoming house-poor is getting a mortgage that works with your budget.

First, think about the size of your mortgage loan. Financial experts generally recommend the loan stay below 2.5 to 3 times your annual salary. This means that if your household's gross annual income is $160,000, you shouldn't take out a mortgage loan that's more than $480,000.

Next, consider how much you're comfortable spending on housing expenses every month. The general advice here is to keep your monthly mortgage payment under 30% of your monthly income. For example, if your monthly paycheck before taxes is $6,000, you should aim for a mortgage payment of $1,800 or less.

Finally, make sure to shop around for the best mortgage rate when you're ready to buy. A small difference in the interest rate can shave off hundreds of dollars of your mortgage payments. Some of CNBC Select's favorite mortgage lenders include Chase Bank, which offers flexible down payment options, and SoFi, which advertises discounts and cash incentives for home buyers. Or, if your credit score is on the lower end, Rocket Mortgage is a solid option for a loan.

Getting a mortgage you can afford is the single best action you can take to avoid being house-poor, but it (unfortunately) can't guarantee you won't get trapped in a too-expensive house.

Chase Bank

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, FHA loans, VA loans, DreaMaker℠ loans and Jumbo loans

  • Terms

    10 – 30 years

  • Credit needed

    620

  • Minimum down payment

    3% if moving forward with a DreaMaker℠ loan

  • Terms apply.

  • Offers first-time homebuyer assistance?

    Yes — click here for details

Pros

  • Chase DreaMaker℠ loan allows for a slightly smaller down payment at 3%
  • Discounts for existing customers
  • Online support available
  • A number of resources available for first-time homebuyers including mortgage calculators, affordability calculator, education courses and Home Advisors

Cons

  • Doesn't offer USDA loans or HELOCs
  • Existing customers discounts apply to those who have large balances in their Chase deposit and investment accounts

SoFi

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    VA loan, FHA loan, conventional loan, fixed-rate loan, adjustable-rate loan, jumbo loan, HELOCS & Closed End Second Mortgages

  • Terms

    10 – 30 years

  • Credit needed

    600

  • Minimum down payment

    3%

Terms apply.

Pros

  • Fast pre-qualification
  • Provides access to Mortgage Loan Officers for guidance
  • 0.25% price reduction when you lock in a 30-year rate for a conventional loan
  • Offers up to $9,500 cash back if you purchase a home through the SoFi Real Estate Center

Cons

  • Doesn't offer USDA loans
  • Mortgage loans are not available in Hawaii

How life can turn you house-poor

With the growth of home prices far outpacing wage growth, it would be easy to assume that all house-poor Americans have simply taken on mortgages they can't afford. But changes in the economy, career setbacks, and even break-ups can conspire to turn an affordable mortgage into something that's a burden.

For example, say a family buys a home with a large down payment and has a mortgage they're comfortable servicing. But after a few years, the couple separates. One of the spouses gets the house, which has appreciated considerably over time. Now this homeowner has an asset with a lot of equity tied to it, but they're solely responsible for mortgage payments which eat up a huge chunk of their income (which presumably is also less after the split). The housing expenses don't leave room for much else.

In a different scenario, a single homeowner lives in a house for two decades and still has a mortgage. Unfortunately, their line of work hasn't offered much room for income growth. At the same time, inflation has increased the cost of living significantly, while property taxes have also shot up. Now the homeowner's housing costs are higher while inflation reduces the purchasing power of their remaining funds.

As you can see, different circumstances can result in having plenty of equity in your home but not enough liquid assets. From a dip in income to investment losses to family changes, many roads can lead to the same place: all of your wealth is tied up in your home while you're struggling to pay your bills.

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What if you're already house-rich, cash-poor

Being house-poor is a recipe for frustration and anxiety, where any unexpected expense threatens to become a crisis. Ultimately, you need to either increase your income or decrease your spending (or both), which means making tough choices. Some options homeowners should consider include:

  • Downsizing: You don't have to stay in the house that's financially draining you. Look into buying a more affordable property and use the equity you have in your home to help you move. However, make sure you've lived in your current house long enough to avoid losing even more money when you pay off your current mortgage.
  • Tapping into home equity: Some situations justify using your home equity. For example, if your home needs urgent costly repairs and you don't have enough in savings, a home equity loan or line of credit can be helpful. If you have significant credit card balances eating into your budget, borrowing against your equity is also a viable debt consolidation option.
  • Debt consolidation: If credit card debt from multiple cards is weighing you down but you don't want to pay it off with the help of your home's equity, you could use a balance transfer credit card to gather all your debts in one place. You can then pay off the balance without any interest charges during the card's promo 0% APR period. CNBC Select's top picks for the best balance transfer cards include the Wells Fargo Reflect® Card and the Citi® Diamond Preferred® Card.

Wells Fargo Reflect® Card

On Wells Fargo's secure site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% intro APR for 21 months from account opening on purchases and qualifying balance transfers.

  • Regular APR

    18.24%, 24.74%, or 29.99% Variable APR

  • Balance transfer fee

    5%, min: $5

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees. Terms apply.

Citi® Diamond Preferred® Card

On Citi's Secure Site
  • Rewards

    None

  • Welcome bonus

    None

  • Annual fee

    $0

  • Intro APR

    0% for 21 months on balance transfers; 0% for 12 months on purchases

  • Regular APR

    18.24% - 28.99% variable

  • Balance transfer fee

    5% of each balance transfer; $5 minimum. Balance transfers must be completed within 4 months of account opening.

  • Foreign transaction fee

    3%

  • Credit needed

    Excellent/Good

See rates and fees.Terms apply.

Note, however, that a balance transfer card usually requires an excellent credit score. Alternatively, you can look into a debt consolidation loan. You won't get a 0% APR period, but you can still get a lower interest rate than what your card charges. Some of our top picks for debt consolidation loans include Upstart for those with average credit and LightStream for borrowers with higher credit scores.

  • Mortgage refinancing: Taking out a new loan on the remainder of what you owe on your home can lower your monthly payments — if you get advantageous terms. Remember that refinancing loans have closing costs like a regular mortgage, so keep them in mind before taking this step. Plus, you may need to meet certain credit score requirements and have enough equity in the home (usually at least 20%).
  • Renting out a room: Finally, you can get additional income by renting out one or more rooms in your home. Being a landlord can be a challenging endeavor, and you might not feel thrilled to share your space. Still, it can significantly boost your bottom line and help you pay for your home.

Bottom line

If you're buying a home, be realistic about your budget to avoid becoming house-poor. That, of course, is easy to say — plus, a high home purchase price isn't the only thing that can put you in this position. If this has already happened to you, know that you have options and try to take small steps toward a healthier financial balance. When your mortgage consumes too much of your income and your savings are non-existent, you're one emergency away from a financial disaster.

Catch up on Select's in-depth coverage of personal financetech and toolswellness and more, and follow us on FacebookInstagram and Twitter to stay up to date.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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