What Does It Mean To Be House Rich, Cash Poor?

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

But what if the equity you hold in your most valuable asset doesn’t make you feel richer when you look at your bank accounts?

If this sounds familiar, you might be “cash rich” (also known as “poor”), meaning you have equity in your home but not enough liquid assets to save and spend. CNBC Select explains how to avoid home poverty – and what to do when it’s already too late.

The best protection against poverty is a mortgage that fits your budget.

First, think about the size of your mortgage loan. Financial experts generally recommend that the loan stays under 2.5 to 3 times your annual salary. That is, if your household gross annual income is $160,000, you should not take out a $480,000 mortgage loan.

Next, consider how much you want to spend each month on housing expenses. The general advice here is to keep your monthly mortgage payment under 30% of your monthly income. For example, if your monthly pre-tax paycheck is $6,000, you should aim for a mortgage payment of $1,800 or less.

Finally, make sure you shop around for the best mortgage rate when you’re ready to buy. A small difference in interest rates can save hundreds of dollars on your mortgage payments. Some of CNBC Select’s most popular mortgage lenders include Chase Bank, which offers flexible down payment options, and SoFi, which offers rebates and cash incentives for homebuyers. If your credit score is on the low end, Rocket Mortgage is a solid loan option.

Getting a mortgage you can afford is the best measure you can take to avoid house poverty, but it (unfortunately) doesn’t guarantee that you won’t get stuck in an overpriced house.

With home price growth far outpacing wage growth, it would be easy to assume that all home-poor Americans simply took out mortgages they couldn’t afford. But changes in the economy, career setbacks, and even breakups can mean that an affordable mortgage can become a liability.

Suppose a family buys a house with a large down payment and has a mortgage that they can service comfortably. But after a few years, the couple separates. One of the spouses gets the house, which has significantly increased in value over time. Now this homeowner has an asset with a lot of equity, but he’s solely responsible for the mortgage payments, which eat up a large chunk of his income (which is probably less after the split, too). Housing costs don’t leave much room for more.

In another scenario, a single homeowner has lived in a house for two decades and still has a mortgage. Unfortunately, her work area hasn’t offered much room for income growth. At the same time, inflation has significantly increased the cost of living, while property taxes have also skyrocketed. Now, homeowners’ housing costs are higher, while inflation reduces the purchasing power of their remaining funds.

As you can see, different circumstances can result in you having a lot of equity in your home but not enough cash. From a drop in income to lost investments to changing families, many paths can lead to the same goal: all your wealth is tied up in your home while you struggle to pay your bills.

Home poverty is a recipe for frustration and anxiety, with any unexpected expense threatening to escalate into a crisis. Ultimately, you either need to increase your income or decrease your expenses (or both), which means you have tough choices to make. Some options for homeowners to consider are:

• Reduction: You don’t have to stay in the house that’s draining you financially. Consider buying a cheaper property and use the equity you have in your home to help you move. However, make sure you’ve lived in your current home long enough so that you don’t lose even more money when you pay off your current mortgage.
• Unlocking Home Equity: Some situations justify using your home equity. For example, if your home is in dire need of expensive repairs and you don’t have enough savings, a home equity loan or line of credit can help. If you have significant credit card balances that are taking a toll on your budget, borrowing against your equity is also a viable debt consolidation option.
• Debt Consolidation: If you have credit card debt from multiple cards that weigh you down but you don’t want to use your home’s equity to pay it off, you can use a balance transfer credit card to collect all of your debt in one place. You can then withdraw the balance during the card’s promotional period at 0% APR with no interest charges. CNBC Select’s top picks for best balance transfer cards include the Wells Fargo Reflect® Card and the Citi® Diamond Preferred® Card.

Note, however, that a prepaid transfer card usually requires excellent credit. Alternatively, you can also look into a debt consolidation loan. You don’t get a 0% APR, but you can still get a lower interest rate than what your card charges. Some of our top picks for debt consolidation loans are Upstart for average-credit borrowers and LightStream for higher-credit borrowers.

• Mortgage Refinancing: Taking out a new loan for the balance you owe on your home can lower your monthly payments — if you get favorable terms. Remember that refinance loans have closing costs like a regular mortgage, so keep that in mind before you take this step. You may also need to meet certain credit requirements and have enough equity in the house (usually at least 20%).

• Rent rooms: Finally, you can earn extra income by renting out one or more rooms in your home. Being a landlord can be a challenging endeavor, and you may not be thrilled about sharing your home. Still, it can significantly increase your bottom line and help you pay for your house.

If you are buying a house, you should be realistic about your budget in order not to find yourself in a housing shortage. That’s easy to say, of course – and 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 you have options and try to take small steps towards a healthier financial balance. If your mortgage is consuming too much of your income and your savings aren’t there, you’re just one emergency away from financial disaster.

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