Being house poor versus being underwater can be easily confused with each other, as both have to do with how much your home does or does not cost and how much you are paying on it. However, there are vital differences to remember since the two situations can happen thanks to very different sets of circumstances.
Here is what you need to know:
House Poor: Paying More Than You Can Afford
When you become house poor, it means that you are spending a majority of your income on home costs like:
- Property taxes
- Home insurance
You become house poor when you do not budget your total income with expected costs of homeownership. As a result, you go month to month paying for your home and may struggle to have enough money for other bills and having fun once in a while.
How To Prevent Yourself From Becoming House Poor
To prevent yourself from becoming house poor, it is essential that you budget appropriately, never purchase a home if you believe you will not spend more than 5 years in it and keep up with maintenance. That way, you can avoid paying for a home you cannot afford or constantly spending money on repairs.
Underwater: Paying More Than What Your Home Is Worth
On the other hand, if your home is underwater that means you owe more on your home than it is actually worth. (For example, imagine you owe $50,000 on a home that is now worth $30,000.)
Underwater properties are also called “upside down” or “negative equity.” Underwater properties happen thanks to a variety of reasons:
- Real estate values drop in your area
- You are consistently late with your loan repayments
- You took out a “no money down” mortgage.
How To Prevent Your Home From Going Underwater
To prevent your home from going underwater and possibly foreclosing, it is recommended that you modify or refinance your home loan for lower payments. You can also continue your payments in hopes that your home’s value will once again go up, but this is a risk as home prices can be unpredictable. If you choose to go this route, it is essential that you decide if you can realistically stay in the home.
You can also do a short sale or strategically default. However, it is vital to remember that these options can negatively affect your credit score as well as your taxes. So be sure to work closely with your lender and financial advisor to find the best option for you.