What does it mean to be house rich, cash poor?

Becoming a homeowner is one of the cornerstones of the American dream. However, many homeowners find themselves in a beautiful home with empty pockets. According to the Chamber of Commerce, 27.4% of American homeowners are “house rich, cash poor” as of June 2023. 

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In this blog, we’ll deep dive into what it means to be house-rich, cash-poor and solutions to better your financial health. 

What does it mean to be house-rich, cash-poor?

A homeowner is considered house-rich, cash-poor when they have wealth tied to their home but lack readily available cash to meet their everyday living expenses. Being cash-poor can result from a myriad of factors, such as unexpected expenses, debt, budgeting issues, medical concerns, or reduced income.

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Unfortunately, as a homeowner’s financial health takes a toll, tapping the equity in their home can become less accessible. 

Solutions for house-rich, cash-poor homeowners

Habits to build financial security 

Financial planning is key to avoiding a cash-poor situation. 

Establish an emergency fund

An emergency fund protects you from financial setbacks when the unexpected occurs. It's recommended to start by saving $1,000. Then, aim for 3-6 months if you're single and have more than one income, or 6-9 months if you are married and have a single source of income. 

Create a budget

Planning your spending helps you avoid strain and makes reaching your financial goals possible. It's best to create and review a budget monthly or quarterly to adjust as needed. 

Live below your means

Living frugally and cutting back on non-essential spending, such as eating out, travel expenses, and entertainment subscriptions, can ease the stress of not having enough money at the end of the month. Additionally, explore ways to cut expenses as a homeowner — not all homeownership costs are set in stone. 

Increase your income

Getting a part-time job, negotiating a raise at your current job, and exploring side hustles can help increase your income and offset your monthly costs. 

Consolidate debt

Debt consolidation allows you to roll multiple debt payments into one single payment. If you can score a lower rate, you'll have a lower monthly payment and save on interest, significantly reducing your monthly financial responsibilities.

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Other debt relief options include refinancing your debt, using home equity to tackle debt, or negotiating with lenders. 

Lower your mortgage payment

Housing expenses are the largest part of many people’s budgets. If your monthly mortgage payments are burning a hole in your pocket, it's time to explore options to lower your mortgage payment. 

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Alternatively, you can invest in home upgrades that lower homeowners insurance or provide yearly rebates. 

Ways to tap into your home wealth and better your finances 

A major advantage of being house-rich is the ability to harness the equity you've built in your home to better your financial situation. With sufficient equity, you can leverage various financial products to make the wealth in your home hard cash — cash that can be used to pay down debt, boost your income, pay for home repairs, and much more. 

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Depending on your credit score, debt-to-income ratio, and the amount of equity in your home, some options may be more accessible than others. It’s best to compare lenders and products to find the best solution for your needs. 

Home equity loans

A home equity loan provides homeowners with a lump sum of cash upfront, which they can use to resolve financial obligations. Home equity loans are attractive to borrowers because they usually come with lower interest rates than unsecured financing options, such as credit cards and personal loans.

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Interest paid on your home equity loan may even be eligible for tax deductions if you decide to use the loans to finance home improvements or a new property altogether.

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It's important to note that home equity loans will saddle you with another monthly payment. So, it's best to weigh the pros and cons before applying. 

Home equity lines of credit

A home equity line of credit (HELOC) is another equity financing tool available to homeowners. Acting as a revolving credit line, a HELOC lets borrowers take out money as needed up to a certain amount over a 10-year draw period. Once the draw period has ended, the repayment period begins, which is typically 20 years. 

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HELOCs are great alternatives for homeowners who want to postpone repayment or need flexibility. Interest rates also tend to be more competitive.

Home equity agreements

A home equity agreement (HEA) provides homeowners with cash in exchange for a portion of their future property appreciation. There are no monthly payments. Instead, you'll repay what you owe at the end of a 10-year term. 

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HEAs are one type of equity-sharing agreement. Another common type is the home equity investment (HEI). An HEI provides homeowners with a lump sum upfront and allows for repayment anytime within 30 years or at the time of home sale. HEIs are attractive financing options because they offer immediate liquidity, no monthly payments, and reduced reliance on debt products. Additionally, they have less rigid criteria: no need for perfect credit and no income requirements. 

Cash-out refinances

A cash-out refinance replaces your existing mortgage with a larger loan and lets you pocket the difference in cash. When you refinance your mortgage, the loan terms and interest rate change. In addition to the closing costs and fees, mortgage payments will be higher. As a result, it's best to be strategic. Refinancing may make sense if you can secure a better rate. 

Cash in on all of your equity

If you're tight on cash and don't qualify for traditional financing, you can explore selling your property to cash in on all of the equity in your home. 

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Putting your home up for sale would require moving, which may not be ideal for everyone. However, it is an opportunity to downsize to a more affordable living situation. Empty-nesters with a lot of extra space may find this option particularly appealing. Consider market conditions, closing costs, and agent commissions before moving forward with a home sale.

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If you have a lien on the property, you can still sell your home; however, you'll likely have to settle your debts first. Selling a house with a lien has several considerations; be sure to connect with any stakeholders before putting the property on the market. 

The bottom line

House-rich, cash-poor homeowners have many options when it comes to regaining financial stability. By exploring refinancing, downsizing, or leveraging home equity responsibly, you can pave a path toward a more balanced financial future, ensuring peace of mind and security.