Originally Posted at BBC Capital
It’s hard to admit that your house is a financial burden. These steps will help you face the numbers and find a fix you can live with.
By Kate Ashford
28 December 2015
Your home is your castle — until the roof starts to leak or the property taxes increase or you lose your job. Or maybe you simply underestimated how much it was going to cost to own that five-bedroom manse. Suddenly you’re struggling to make your monthly loan payments and feeling strapped.
Homeowners aren’t always prepared for the maintenance and other unexpected costs that come with ownership. In a survey of US homeowners who had regrets about the homes they purchased, 12% wish they’d understood the costs better before deciding, and 11% wish they’d chosen a smaller home, according to a survey by real estate site Trulia.
Across the board, people are over-housed.
In the UK, one in 10 homeowners regret buying their home, with 12% citing that it needed more work done than they expected, and 6% saying they can’t really afford their mortgage, according to mortgage and loans provider Ocean Finance.
“Across the board, people are over-housed,” said Kevin Reardon, a financial planner with Shakespeare Wealth Management in Wisconsin in the US. “I heard one person describe it as, ‘Thirty years ago, you’d have a family with four kids living in a 2,000 square-foot house. Now you have a family with two kids living in a 4,000 square-foot house.”
Finding yourself living in a house you can’t afford is stressful. If homeownership is hurting your wallet, here’s what you need to consider.
What it will take: You’ll need the wherewithal to gather your financial information and face the numbers. It’s hard to admit it when you’re overspending or under earning, but if keeping your house doesn’t make financial sense, you may have to get comfortable with the idea of downsizing.
How long you need to prepare: If you’re in a cash flow bind, you don’t want to wait too long before you take action. But you should take some time to calculate the size of the problem. “A lot of times people don’t really look at their expenses,” said Julia Chung, a financial and estate planner with Spring Financial Planning in British Columbia in Canada. “They have a hard time managing the numbers.”
Consider using an app like Mint, available in multiple countries, which will pull all the data from your bank and credit cards so you can see all your income and expenses in one place. “For those people who are not very good at sitting down and breaking out the numbers, an app would be a really useful place to start,” Chung said.
Do it now: Pinpoint the problem. Is it a cash flow problem or a cash management problem? In other words, are you in trouble because you aren’t making enough income to cover what it costs to own your home? Or are you doing a poor job of budgeting and spending too much money on non-essentials every month?
Determine your timeline. Is this a temporary issue, such as a job loss or a spouse leaving work to care for a baby? Can you fix it with a new, better-paying job or slashing costs significantly until your spouse can go back to work?
“If you just lost your job today and you feel like your world is crashing down around you, you very well might be able to find a job in a month or two months, so what can you do in the next two months?” Chung said.
In general, we spend too much money on things we don’t need that are worth a lot.
In a short-term bind, you can also make short-term moves to bridge the issue. Can you borrow from family? Pick up a part-time job on the side to make up the difference? “Also, look literally at what you can sell,” Chung said. “In general, we spend too much money on things we don’t need that are worth a lot, from electronics to art to clothes. Go to Craigslist and get some cash in the short term.” Craigslist is available worldwide, but sites like Gumtree and eBay also allow you to offload some of your extras.
Talk to your mortgage broker. If you get behind on your mortgage payments, it might feel daunting to have a conversation with your lender. If you’re really in danger of missing a payment, though, give your lender a call — there might be options for refinancing your loan. Many lenders also offer a payment grace period, after which a late charge is issued. If you know your payment is going to be late, call ahead to let your lender know and you may be able to get the fee waived — but probably not repeatedly.
Leave your retirement alone. Think carefully before you take money out of retirement savings to fix a housing shortfall. “I really do not like seeing clients tap 401(k)s or other retirement accounts, even for loans,” said George Gagliardi, a financial planner with Coromandel Wealth Management in Massachusetts in the US. “Rarely do such loans get paid back, and it creates additional taxes and loss of retirement assets and tax deferral.”
Once you recognise the problem, get over the emotional hurdle that goes with downsizing.
Get some objective help. If you aren’t making headway or can’t make a decision, consider enlisting the help of a financial advisor who can go through the numbers with you. A planner can put together some visuals that help you understand what will happen to your financial future with and without your expensive house. “People understand graphics,” Reardon said. “Let’s say you did downsize, let’s see what that does to your financial projection. Graphically they can see that if they do X, they get Y.”
Do it later: Downsize. If you truly can’t afford your home — or it’s costing so much that you’re in danger of running out of money in retirement or not being able to meet other goals — it’s time to consider selling it and buying something cheaper, or consider renting for a while.
It can be an emotional decision to sell a home you view as a status symbol or that you’ve lived in for years, but a smaller mortgage — and the smaller utility, maintenance, insurance and tax bills that go with it — might be a relief. “Once someone does it, there’s this dramatic ‘Ah ha’ moment, like ‘Why didn’t we do it sooner?’” Reardon said.
Renting can also be a cheaper alternative, depending on where you live. You won’t have to worry about property taxes, homeowners insurance (renters insurance is much less expensive), or maintenance costs for the big items that break down.
Do it smarter: Get over it. “Once you recognise the problem, it’s important to get over the emotional hurdle that goes with downsizing,” Reardon said. “Many people view downsizing as a sign of financial failure, and as a result don’t act until the problem gets worse.”
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