October 12th, 2018 5:34 PM by Jackie A. Graves, President
cash-poor" sounds like the title of a country song. After all, how can
someone be rich and poor at the same time, unless they're fighting some poetic
struggle in a twangy ballad? Well, it all comes down to how much you have tied
up in your home, compared with how much you have in your pocket.
explained in real numbers
house-rich and cash-poor means you have more equity locked into the value of
your home than you have in liquid assets.
Goldfeld, co-founder of the New York–based real estate brokerage startup
Yoreevo, breaks down how the house-rich, cash-poor scenario can play out:
As a real
estate professional in St. Petersburg, FL, Patricia Vosburgh advises
her clients not to become house-rich and cash-poor due to her first-hand
experience in the 1980s.
tell you it's not a great place to be," she says. "The slightest
financial hiccup in your life can become an issue."
instance, if you run into large medical bills or a costly home repair, you may
not have the money to pay for it. Beyond that, being house-rich and cash-poor
can lead to a downturn in your quality of life.
working constantly to hold onto the asset and not really enjoying the benefits
of homeownership," says Vosburgh.
it's a bit of a mixed bag: Thanks to a healthy economy, low unemployment, and
stricter lending requirements put in place after 2008, many homeowners are
house-rich, meaning they have good equity in their home. Yet many of these same
homeowners are also cash-poor, lacking the reserves
necessary to see them through life's ups and downs.
buyers are saving up lots of money for the down payment—usually between 5% to
20%," says Cedric Stewart, a
residential and commercial sales consultant at Keller Williams in the
Washington, DC, area. "But they often don't leave any money for the 'what
if' fund, such as emergency home maintenance."
vulnerable to becoming house-rich and cash-poor are buyers looking to trade up
their current home.
buyers take the money from the sale of their current home and plunk it all down
on the next one," explains Stewart. That's a risky move, he says, since it
leaves you no financial wiggle room for whatever financial curveballs may come
line: A buyer should never leave themselves cash-poor, says Ralph
DiBugnara, vice president at Residential Home Funding.
going to cost you every bit of savings just to acquire the house, you may not
be ready for that specific home," he says.
understand your finances before you buy a home, recommends Goldfeld. For
starters, try entering your income and debts into a mortgage calculator to
figure out what price you can afford on a home. Speak to a lender to find out
how large a home loan you qualify for, too.
will help you figure out what your monthly expenses would be if you had to pay
for that mortgage. Take note: Even if you qualify for a large mortgage, you
don’t want to get yourself into a position where every little expense is
difficult to pay for.
So make sure
you have at least a year of whatever your recurring monthly payments would be
in reserve and shoot for a debt-to-income ratio under 30%. Then set a
reasonable budget for the purchase price of a home. Look for a healthy balance
between investing in a new home and creating your ideal quality of life after
the home is bought. (It's plain common sense to hold enough cash back to have a
financial cushion in
case of an emergency.)
option is to get a home warranty to
cover any unexpected home expenses.
all my buyers to ask for one from the seller or pay for it themselves,"
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