When real estate agents are selling houses, they largely talk about monthly house payments, at least if it has anything to do with cost. And often they’ll talk about the monthly payment as if it’s the only expense associated with the purchase of a home. But the true cost of owning a home is rising relentlessly, apart from the initial house payment.
Here are some prominent examples.
Real Estate Taxes
Real estate taxes are actually a variable, depending upon where you live. In some states and communities they’re relatively minor. In others, they can come close to matching your mortgage principal and interest payment.
This is more pronounced in high-cost areas, such as the Northeast and the West Coast. In such areas, real estate taxes amount to many thousands of dollars each year. For example, New Jersey takes top honors for having the highest average property taxes in the country – over $7,300 per year. But several other states have averages that exceed $5,000 per year.
Not only do real estate taxes make a monthly mortgage payment even higher, but they have a way of escalating over time. Unlike your mortgage principal and interest payment, real estate taxes continue to rise the longer that you’re in the property.
Adding insult to injury is paying off your mortgage, but still being stuck with what amounts to a $1,000 per month equivalent real estate tax bill. It’s not ridiculous. Before my mom sold her house in 2014, her real estate taxes were just over $12,000 per year. The real estate taxes alone were several times higher than what the original total house payment was 30 years ago. And no, she didn’t own a premium house.
That outcome makes the prospect of ever living in your house “free and clear” a complete myth!
Repairs and Maintenance
When I was in the mortgage business, it was routine to make loans that would enable people to fit into their new payment with shoehorn. That is to say that based on the principle, interest, taxes and insurance (PITI) – the basic house payment – the buyers were stretched to their extreme limits of affordability.
That equation completely ignored the real world implications of the need to make repairs and maintenance on an owner occupied residence. This is a factor that doesn’t even apply to rental situations, and real estate agents prefer to ignore it when doing rent-versus-own presentations, that are designed to prove the advantages of owning over renting.
But repair and maintenance expense is a very real cost, and one that tightly stretched households become keenly aware of at the worst possible times.
HomeAdvisor.com reports that the average cost to replace a roof is $6,582, within a typical range of $4,560 and $8,686. The same site reports the average cost to replace a furnace at $3,875, and $5,206 to replace a central air conditioner.
These are typical replacements you can and should expect to cover within a typical ten to 15 year time frame. And there are many more. A handyman I used often when I owned my own home once told me that homeowners should budget $300-$500 per month to allow for repairs and maintenance. I was somewhat doubtful, so I did some calculations. My handyman friend is absolutely correct.
One of the complications here is that as the number of people who have repair skills declines – in favor of college norm occupations – the price of repairs increases, as the number of practitioners falls.
Taking the midpoint on my handyman’s repair and maintenance estimate, you should figure an average of $400 per month, or $4,800 per year for this expense. It’s quite realistic over the long-term.
When I first got into the mortgage business back in the 1980s, we commonly estimated $20 to $30 per month for homeowners insurance. Now, $75-$100 is much more typical. And in some areas, that’s way short of the mark.
A former coworker friend of mine confessed that her and her husband needed to sell their house because of the homeowners insurance. Their house was located on the east coast of Florida, an area well-known for hurricanes. Their annual homeowners insurance bill was over $11,000.
That’s hardly unusual when you live in an area that is subject to natural disturbances, such as hurricanes, flooding, and earthquakes.
And in case you hadn’t actually thought about it, much like real estate taxes, homeowners insurance will remain an expense on your home even after your mortgage is paid for.
Even though the price of oil and gasoline rises and falls in different market environments, utilities function as something like an elevator that only goes up. Rates will certainly rise when energy prices do. But when energy prices decline, as they have in the past year, utility prices typically do no better then stay flat.
As an example, despite the fact that natural gas prices have fallen more than 40% in the past year, our gas utility notified us over the summer that our rates would be going up by 13%.
When you’re looking for a new place to live, utility expense needs to be seriously considered. In our last house, our combined gas and electric bills averaged over $300 per month. That was a ranch type home located in Georgia, with mild winters and searing hot summers. We were also paying about $100 per month for water, sewer, and garbage removal. Total average monthly utility bill: $400.
When we moved to New Hampshire we expected the utility situation to only get worse. It didn’t. Despite the Artic-like winters, our average gas and electric bills are under $200 per month. This is because we are now living in a townhouse, that has units on both sides. That minimizes external exposure to the cold weather. In addition, the house has an extremely energy-efficient furnace. As a result, our gas bills average a ridiculously low $25 per month. We have no extra charges for water, sewer and garbage pick up (included in tax bill), so our total monthly utility bill is just $200 per month.
That saves us $200 per month – or $2,400 per year – compared to our last house.
When you’re considering making a move, be very careful of the type of home that you are moving into. An energy-efficient home, with energy-efficient heating, hot water and air conditioning, can save you real money.
Utility bills are no longer a minor expense, and should never be ignored when looking for a home.
Summarizing the True Cost of Owning a Home
Let’s crunch some numbers. Let’s say that you are considering purchasing a home for $250,000. You put 20% ($50,000) down, and take a $200,000 mortgage at 4.00% on a 30 year fixed rate mortgage. That will result in a monthly payment of $955. That looks like a bargain compared to what rents are in much of the country.
But it’s only the beginning.
Your initial fixed monthly house payment will look like this:
- Mortgage Principal and Interest: $955
- Real Estate Taxes ($4,800 per year): $400
- Homeowner’s Insurance ($1,200 per year): $100
- TOTAL PITI: $1,455
That still looks like a deal compared to rent, especially if you get a significant tax write off for the mortgage interest and real estate text portions of your payment.
But now let’s add repairs and maintenance and utilities to that monthly payment.
- PITI: $1,455
- Repairs and Maintenance monthly allowance: $400
- Average monthly Utilities Expense: $400
- TOTAL REAL MONTHLY PAYMENT: $2,255
This calculation makes it easy to see why people often struggle with their house payment, despite the fact that they may have easily qualified for the mortgage. The reason that they do is because the “soft costs” of owning a home are completely ignored by both the mortgage lender and the real estate agent, who focus exclusively on PITI.
Owning your home “free and clear”. All of these costs water down the hallowed notion of paying off your mortgage and living “free and clear”. The only part of that $2,255 payment that will disappear after paying off the mortgage is the $955 portion for principal and interest on the loan. That means that “free and clear” will still cost you about $1,300 per month, even without a mortgage payment.
As you can see, the true cost of owning a home is typically greatly understated. But if you’re looking to buy a home, you should be aware of these costs, and understand fully what it is you’re plunging into.
Have you factored all of these expenses into the cost of home ownership?