You’ve probably heard many people say “renting is just throwing money away” and buying a home is the better financial decision.
That may be the conventional wisdom, but does that mean that it’s true?
The problem with really common advice is that we often assume it’s correct, or absolute, without taking the time or making the effort to understand it for ourselves. And then we pass it on to other people, because we think it’s true.
The truth is, homeownership is expensive. There are some definite perks to owning a home, and there are a lot of reasons to be a homeowner. But there are also a lot of negatives that tend to get glossed over.
This article isn’t really about renting vs. buying and how to decide which is the right move for you (for that topic, please see my article Buying vs. Renting). Today, I want to look at the true costs of homeownership. Before you can make an informed decision about renting vs. buying, you need to understand the big picture.
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- The Realities of Mortgage-Free Living
My Homeownership Experience
Just to give you some background on my perspective, my wife and I bought our first home in 2007, about 9 months after we were married. It was a two-bedroom condo that we planned to live in for a while, and then keep as a rental property when we eventually moved.
As it turned out, 2007 wasn’t such a good time to buy a home. The value dropped very shortly after we bought it.
In 2008, I started working from home. In 2010, my wife was able to transfer into a role that allowed her to work from home as well. Once that happened, we decided to move to an area with a lower cost of living.
We sold our condo in 2010, and we had to take about $7,000 to the settlement to get out of the mortgage since the value had dropped. But on the bright side, we were able to buy a new construction single-family home for what we felt was a really good price.
Four years after buying that single-family home we paid off the mortgage to become completely debt-free. We planned to be in that house for a long time, but in 2016 (after 6 years in the house) we moved to another home a few miles away, which is our current home. We moved mostly to get a bigger lot and more privacy.
Since we had become accustomed to not having a mortgage payment, we decided to pay for our current house in cash, even though it was almost $200,000 more than the house we sold.
We’ve lived in a small condo, a moderately-sized single-family house, and now a bigger single-family house (we now have two kids as well). We’ve lived in a new construction, and our current house is almost 30-years old now.
I don’t want this article to come off as being against homeownership, because I actually prefer to own my home. But I do want to take a balanced look at the issue and talk about the real costs that come along with being a homeowner.
The Costs of Homeownership
There are some costs of buying and owning a home that are pretty obvious. These are the ones that most people consider when making a buying decision. We’ll get to the hidden costs in the next section.
For this article, we’re going to look at a fictional example. Of course, property values and the associated costs of home ownership vary drastically depending on where you live, the type of house you buy, and many other factors.
I want to work with numbers in this article to make it a better illustration, but keep in mind that these numbers are just a fictional example.
For our example, we’ll assume a purchase price of $300,000 for a home. Depending on where you live, this might be a really nice home, or it could be unrealistically low.
Costs of Buying a Home
The transaction costs for buyers tend to be about 2% – 5% of the price of the home (source). I don’t want to get into all of the details of these costs here, but I do have an in-depth article about the costs of buying and selling a house if you want more information.
For our example, let’s go with 3% of $300,000, which comes to $9,000 in fees and transaction costs.
That does not include the down payment. Typically, you’ll want to put 20% down to avoid paying private mortgage insurance (PMI) each month. PMI can really add to your monthly mortgage payment, and it does nothing for you. It’s there to protect the lender, not you.
If you were to put 20% down on a $300,000 home, that would be a down payment of $60,000. After the $60,000 down payment, that leaves a mortgage of $240,000.
So the total of the down payment and the fees and transaction costs comes to $69,000.
The Monthly Costs of Homeownership
The most obvious monthly costs of homeownership include:
- Mortgage payment – $1,216 (based on 4.5% interest on a 30-year mortgage)
- Property taxes – $500
- Homeowner’s insurance – $33
- PMI – $0 (will apply if you put less than 20% down)
- Homeowner’s association (HOA) fees – $0
These are the costs that add up to your total monthly payment for the home, assuming you have an escrow account with your lender for the taxes and insurance. Even if you don’t have an escrow account, you should be setting that money aside each month to avoid the shock of an annual bill.
For our fictional example, the monthly costs come out to $1,749, assuming no PMI and no HOA. (Remember, these numbers are a fictional example. Property taxes will vary greatly.)
The Hidden Costs of Homeownership
Ok, so the items covered above are probably the expenses you’ve considered when you’re thinking about the costs of buying and owning a home. But in reality, there are many other costs associated with being a homeowner. These costs can vary depending on the home and the property.
You probably won’t have all of these expenses, but you will have many of them, and they are all possibilities. Some of them are things you can do yourself, but also keep in mind, that requires an investment of a lot of your own time.
Let’s take a look.
Maintenance and Upkeep
Being a homeowner requires a lot of maintenance and upkeep. Just how much will depend on things like the age of the home, how well the home has been maintained in the past, and the size of the home.
This can include things like fixing appliances, plumbing, electrical work, and anything else that needs to be fixed. Some of the expenses that fall into this category could be planned expenses (like a yearly servicing of a furnace), or it could be unexpected things that come up.
As a general rule of thumb, most experts recommend budgeting for maintenance expenses to equal 1% – 2% of the home’s value each year.
For our estimate, we’ll go right in the middle at 1.5% per year. That comes out to $4,500 per year, or $375 per month.
Your utility expenses will include things like electricity, natural gas, water, sewer, and I’ll also include trash in this category. According to this study by ATTOM Data Solutions and UtilityScore, utility costs add 25% to U.S. homeownership costs.
25% of the mortgage payment of $1,216 equals another $304 per month for utilities.
If you have a home security system, you will probably have monthly monitoring fees. The fees can vary depending on the plan that you have and the company you choose, but $30 per month is a reasonable estimate. And if you’re getting a new system, you may have some costs to purchase or install the equipment.
This is an expense that can be avoided, but it’s also an expense that many homeowners pay. You could also hire a cleaner if you’re renting, but rentals tend to be smaller, and cleaning a bigger house takes more time, and you’re more likely to hire someone to do it.
The cost will vary depending on who you hire, how often they clean, and the size of your house. As a safe estimate, we’ll go with $200 per month.