House-Rich and Cash-Poor

There is a common term in personal finance called “house-rich and cash-poor.” This phrase is used to refer to a person who has more money in the value of their home than they do in their bank account, meaning that while they may live in a nice house they typically cannot afford the lifestyle that is associated with it. These are people who have taken out large mortgages and spend north of 30% of their income on housing. While many people prioritize having their dream home over things like cars, travel, and shopping, it typically is not the wisest financial decision. 

If you find yourself in this situation then you have a variety of options to improve your financial state. The first step is always going to be to sit down and look at your spending habits. If you realize that you have a mortgage that is preventing you from building a savings account to prepare for sudden costs like an emergency home repair or a medical bill then this is usually a red flag. Once you have identified the situation you can determine what your next step should be. 

The most favorable option for most people is going to be a cash-out refinance or a home equity line of credit. Chances are if you have been living in your home for several years or if you placed a large down payment on the property then you will have built up a significant amount of equity in the home. This means that you have a lot of money in the property between the money that has been made in your monthly mortgage payments and the appreciation of the market. For example, if you bought a $500,000 home in 2015 with a 20% down payment then you had $100,000 in equity right out of the gate. Then let's say that home values in your area have risen 10% in the years between 2015 and 2023. This means that you now have 20% equity in a home that is worth $550,000 even though you only put down $100,000. In addition to this you also have been making monthly payments for 8 years that have been pushing down the balance of your $400,000 mortgage. These two factors combine to give you your current home equity. To determine exactly how much money you have stored in the value of your home it is essential that you speak with an experienced real estate agent as well as your lender. From there they will be able to recommend the next step that is best for you. 

At this stage you have the option to either take a line of credit against your home that you can use to increase your quality of life or purchase a cash flowing asset like an investment property. Alternatively you can also choose to downsize to a more affordable home and use the remaining money to do the same thing. This is a decision that will vary greatly depending on both your personal and financial life, and our team of experienced real estate professionals would be more than happy to help analyze your situation to find you the best choice to meet your goals. 

For more information about being “house-rich and cash-poor”, take a look at this in-depth article from Realtor.com.