Buyers focus on the mortgage but it doesn’t tell you the true cost of home ownership. With your first home, you compare your mortgage payment to the rent you’ve been paying but wait, what expenses were included in your rent? Your landlord pays the mortgage, taxes and insurance. Most states require water to be included in your rent and what do you do when the window won’t shut? You call the landlord and he/she handles the repairs.
Most homeowners don’t know how much they’re spending on their homes. We’ve been taught to focus on the initial price of a car or refrigerator. We rarely consider the annual operating costs even with stickers telling us how much it will cost. When I bought my Toyota Rav4 in 2007, I calculated how much more a 6-cylinder would cost versus a 4-cylinder car and ordered the 4-cylinder. The dealer tried to discourage me, telling me it would hurt resale. Amazingly, 6 months later I could have sold my car over purchase price because of the higher mileage when gas prices went over $4/gallon.
Cost of Home Ownership: Financial Costs
Your financial obligations are the biggest part of your cost of home ownership. Sadly, home buyers don’t estimate the total cost of home ownership when deciding how much house they can afford.
- Mortgage principal and interest – varies based on how much you paid for your home (or refinanced) and the interest rate. Most homeowners today don’t know how incredible 4 or even 5% interest rates are compared to rates that have escalated to more than 10% (18% in 1981) over the last 30 years (details at FreddieMac.com).
- Property taxes – you live where you do because you grew up there, or got a job and moved there. While most people don’t look at state property taxes until they’re researching where to live in retirement, you should research local property taxes which can vary significantly.
- Insurance – the average (across the US; for more details visit the Insurance Information Institute website) homeowners insurance premium was $978 in 2011.
Cost of Home Ownership: Operating Costs
When you go from renting an apartment to home ownership, suddenly you’re paying all the utilities where the landlord might have included some of them in your rent. You likely have you more square feet and that means more space (cubic feet) to heat and cool. This map from One Block Off the Grid provides a nice visual comparing gas and electric costs across the US.
- Electricity – costs vary across the US from a low of $75/mo in New Mexico to more than $200/mo in Hawaii. You can check your state’s average costs here …
- Heat – is a tough statistic because there are so many different ways to heat your house, so here’s a map showing the average spending on gas and electricity (different than electric numbers above) across the US, although it appears to be missing the cost of heating oil.
- Water – varies from nothing if you have a well to more than $200/mo in larger cities, with the average water bill in the US at $51/mo according to LeakBird.com.
- Phones – is a funny item these days as most people have done away with landlines, and for those that still have them, they run between $20 and 30/mo. Even if you try to save money by using Voice Over Internet (VoIP), you’re going to pay about $30 after an introductory rate for 6 to 12 months.
- Cable - are much too expensive at $78/mo, and according to Forbes.com, The Cable Bills Too High; Here’s Why, it’s because our government has given up regulating this industry, allowing it to grow unchecked.
- Internet – costs average between $50 and 60/mo, depending on which Internet service provider you use.
- Maintenance services – like lawn care and pool maintenance can add up quickly, so it’s a personal decision of whether you can afford the added costs versus do-it-yourself … so for this example, let’s assume an average of $100/mo.
Home Ownership Includes Improvements & Repairs
So it’s not surprising that most homeowners don’t budget for home improvements and repairs. Given the costs outlined above for the average US home with a $200,000 mortgage – principal and interest of $1,074 (5% interest rate), taxes at 1.25% or $260/mo, insurance at $82/mo plus operating costs of $557/mo = total cost of ownership at $1973/mo.
But wait, what about home maintenance and repairs? And what happens when your roof leaks and the estimate for a new roof is almost $8,000? To avoid the added costs of repairs from a leaky roof, or making the wrong decision under stress you should budget for ongoing maintenance and repairs.
You might think you’re saving money by ignoring home maintenance but it will cost you more money, and a lot more stress. By replacing your roof before a major leak, you’ll avoid repair costs (attic insulation, soggy drywall and more) and you’ll have time to find a reputable roofing company rather than going with the cheapest roof or the only roofer to give you an estimate the day after the leak.
You should budget 1 to 2% or $200 to 400/mo ($2,500 to 5,000/yr for a home worth $250,000) for ongoing maintenance and plan for replacing home features like your roof, hot water heater and more than we can explain here but we’ve got you covered.
… so how much should you be budgeting for home improvements and repairs?