Owning a house can be a great investment for the future, but it can also leave you cash-poor. Being house-rich and cash-poor means that although you own a valuable asset, you do not have a lot of liquid cash to cover day-to-day expenses or other investments. Individuals who have recently purchased a home or are considering doing so, need to be aware of the challenges of being house-rich and cash-poor and take measures to prevent it. Here are some steps you can take to avoid being caught in this trap:
Access Your Equity: One way to determine if you are house-rich and cash-poor is to calculate your home equity. This can be achieved by subtracting the mortgage balance from the current market value of the house. If your home equity is more than 60% of your home’s market value, you may consider refinancing your mortgage. Streamlining your current mortgage can also help you get access to cash from the equity you have in your home, which can be used to pay off other debts or emergencies.
Reduce Your Mortgage Payment: If your monthly mortgage payment is eating up a significant amount of your monthly income, it’s a clear sign that you are struggling with cash flow. You can reduce your mortgage payments by refinancing your mortgage with lower interest rates or extending the term of your loan. Additionally, you can consider making a lump sum payment to decrease your principal and get a lower monthly payment.
Rent Out a Room: If you have a spare room, consider renting it out to help generate some extra income. This can be an excellent way for you to save money while simultaneously increasing your income. It also helps you to quickly pay off your mortgage, which can reduce the amount of interest you will end up paying in the long run. Pro tip: You can also look into short-term rentals. Airbnb is a great option for renting out your house during a week of tourism in your town.
Consider Downsizing: Many people we speak with who are in this situation are retirees whose income has been reduced recently. Perhaps the house you needed while the kids were still in the house is just not necessary anymore. Maybe it is time to trade the square footage for something that better fits your current lifestyle. Keep in mind, with the equity you've built up, you can find something else you love, maybe a cabin in the mountains or a cottage on a lake. Dream a little!
Revisit Your Budget: If nothing else, finding ways to increase your income or reduce expenses is always an option for those struggling to make ends meet. Consider cutting down on expenses by reviewing your monthly budget and prioritizing needs vs. wants. You can also evaluate your discretionary spending, such as eating out and shopping, to free up more cash.
Being house-rich and cash-poor can be a significant challenge for young individuals, but it is not unsolvable. By being aware of your financial status, you can take steps to improve it. From checking your home equity to finding other sources of income, the options are endless. The most important thing is to take action and take control of your finances.