Real cost of home ownership
Homeownership is the American dream. It was what we are told to strive for from a young age. Guest rooms, multi-car garages, picket fences. You name it and we can get it for you. In the era of mortgage lending, it is easy to get a home that you can “afford”, at least once the bank gives you that loan. What is not well thought out is the true home ownership costs.
Sure there is the typical things we think about. PITI (what a fitting name, as in the bank pities the person who gets an expensive mortgage) which stands for Principal, Interest, Taxes, and Insurance. This is the typical things we factor in when buying a home. Then there are the less definable costs such as utilities and maintenance. Sure you can ask to see a years worth of utilities from the prior owner, but you never know how it will truly pan out.
I bought a home despite my own best judgement
I know all of this. Home ownership is expensive. I even discussed whether or not to buy a home and how buying a home is rough. Despite my better judgement, I got suckered into another home purchase. A combination of the view from the home, needing space for my son and my dog (it is surprisingly hard to find a rental with a dog), and the argument that home prices seem to rise quickly in California all led me to purchase a new home.
I did my due diligence and shopped around for mortgages, finally deciding on a 7 year ARM. I obtained a home inspection and even had my real estate agent buy me a home warranty. Due diligence was met. Despite all of this, I could not account for how much this house was going to cost me. We moved in November 2016 and over the last 6 months have spent well over $35,000 then if we had just continued renting the apartment we were living in.
Home ownership costs
What were the unexpected costs? Well they fell into mainly the utilities and home maintenance. These were higher than initially expected, particularly the gardner who will be being replaced by me in the next month as discussed here.
Maintenance was also a beast. While some of these issues came up during the home inspection, the costs were still real and higher then initially expected.
So where did the money go over that time. Well here is a break down as part of percentages. I did not put actual numbers in because it would make most personal finance bloggers vomit to see how many dollars have gone into this home.
Okay, so what does this tell us.
Mortgage interest
We spent 27.9% of our money on interest over 6 months and only 20.9% on principal. This is with a super low rate of 2.8%. This sucks. More is going to the bank then to our principal every month. Actually more is going into interest than any other category. Think about that. All of those dollars just being swept away by the bank. Sure I will recoup some of this with income tax deduction but I would rather just have the cash back.
Take away: Consider how much money you are giving the bank each month. We are in essence paying them for the privilege to live in this home. There is a lot of cash going to the bank over 6 months. Well over $10k.
Also, don’t use the mortgage interest tax deduction as an excuse to buy a home you don’t need. Many people rationalize having a mortgage for the income tax break. It is not a good argument. If you could own your home today, would you take out a mortgage just to get the income tax break? I doubt it.
Home maintenance
Home maintenance is killing me. I have spent 21.1% of my money in the first 6 months on home maintenance. This is the second largest bracket that money is going to. This has included fixing a sump pump, a leaking roof, a broken garage door spring, a washing machine, a dish washer, electrical wiring outside of our home, and the list goes on and on. I did include some of my desired purchases which included planting trees and setting up my vegetable garden. Still, I did not account for 21% of my home ownership costs to be going to home maintenance.
Of note, in February we did not have any home maintenance costs. It was a very reasonable month for home ownership costs in relation to my income. So that is reassuring and I will be looking at February as my marker for how much my home monthly expense should actually be. Still you can never account for the unexpected maintenance issue to creep up.
Take away: When buying a home, take serious consideration of the age of the home and get a good home inspection before buying. We were able to recoup a few grand for the sump pump an roof based on our inspections. Furthermore, consider a home warranty for the first few years you are living there. It may save you a few dollars in the long run.
Utilities
We spent 14.5% of our money on utilities. This includes solar (we have a leased system which I would not recommend), gas, electric (for when the solar system does not produce enough juice), water bills, alarm system, and our gardner. I estimate that the solar system saves us about $200 compared to using just the city electric utilities. I will be cutting my utilities by November when both the gardner and alarm system will be discontinued, saving me almost $4,000 a year.
Take away: Don’t underestimate how much it costs to power up and heat a big home (our’s is 3,000 square feet which is about 1,000 more than we need) and water a big lawn.
Taxes
Taxes also end up being more then I considered. 14.4% of my expenses have been taxes. The tax man always cometh. I also was hit with a supplemental $1,000 tax bill from the county due to the higher purchase price of my home. They were kind enough to adjust my taxes upward for me without me even asking.
Don’t buy too much home
I have lamented on this site and other sites that my home is my biggest hinderance to financial independence and definitely to early retirement. I do not see any possible way to retire in 10 years while owning this home.
Still, I am not sure what I want in 10 years. I do know I want to be more financially secure. Maybe I can get there while still holding onto this house, but I know it is going to take a lot longer.
The process of evaluating my 6 month home ownership costs is an eye opener for me and my wife. We knew we were spending a lot of money, but really had no idea where it was all going. Discussing these costs may also lead to us selling the house in the next few years and downsizing. Only time will tell and I hope you stay with us while we figure it out.
What are your thoughts on buying a home? Ever been surprised by the unexpected costs of maintenance and utilities?
Also published on Medium.
As someone who is currently house hunting, this is an eye opener. I kind of figured that we definitely need a home inspector but wasn’t aware of getting a home warranty. Plus with interest, that is really high percentage. I’m guessing that percentage is will drop gradually as the principal will go the other direction.
It really is shocking how much money can go into a home. A home warranty is worth it on older homes. We actually will keep ours for a few years to work out the kinks of this home. We have well used the $500 annual cost this year.
Nice post. Definitely buying a bigger home carries bigger costs. I am into my second year of attending salary and was really tired of renting all the time. We bought a house well under our budget but we had viewed another one that was more expensive. At the end, we are really happy that the deal for the most expensive home did not get through (we got outbid, the best way to make money out of a home is not to overpay). Maintenance expenses so far here are in the 5% range (fingers crossed).
Definitely the best way to make money is to not overpay. I don’t think I over paid (probably paying market value) but this means that after the commissions, etc. if there is not much appreciation we loose cash. Maintenance is horrendous and I am hoping the next 6 months will be better. Time will tell.
Ugh, I’m feeling the utility costs right now in our home. We bought a house less than a year ago and I’ve been shocked at how expensive it is! We could NOT have bought a house and maintained it to our standards without getting rid of debt and cutting our expenses first.
It is pretty wild how expensive these things can be. We have solar and still are paying quite a bit. There is something that sounds nice about a small home with a small lot. We will see where things take us in the near future.
Maintenance can be a killer, especially in older homes and those that were neglected by previous owners. Unfortunately, my home checks both of those boxes. It’s 110-years old, and an incomplete list of repairs over the last decade includes new roof, repointing all the exterior brick and chimneys, new furnace and a/c, new hot water heater, all new appliances (as part of a kitchen remodel), new front sidewalk, new exterior paint, not to mention routine annual maintenance of our PITA box gutters.
Oh sure, it’s got frickin’ charm. It better have more charm than 1000 boxes of Lucky Charms with the money I have put into it!
Most of the big expenses only need to happen every 20 years, so we should be good for a while.
Wow. A 110 year old home. Nice job on taking up the effort. I love old homes but think that a brand new home is looking more and more charming. The good news is those big expenses are rare, but when they hit they can take a chunk out of the savings account. Hang in there and enjoy the Lucky Charms (great reference!).
Dr. Curious,
I feel your pain on the 110 year old homes. A well needed home renovation to replace hazardous knob tube electical and various plumbing experiments was enough to send us over the $1,000,000 total debt mark and part of the motivation to get my financial house in order.
The good news for you all with high utility costs, check out Green Building Advisor for insights on how to make your home more efficent.
Part of the expense of our renovation was addressing air leaks and insulation deficiencies. This actually has saved us money, bringing our electrical bill down by $200-300/month for the rest of the life of the home.
If you are renovating, put your money into the structure, insulation, etc.. it will be there the longest and pay for itself over time. Save money on your mechanicals which need replacing every 10 years or so anyway.
Great points. The shell/structure is where the money is. It is the hardest to change and provides the most immediate financial benefits. I am assuming you are talking from experience in which case kudos for taking on the challenge. I am recently debating buying an old Airstream RV to remodel. Much less effort than a house but could still be a lot of fun.
I am somewhat new to owning real estate but both homes I have purchased the mortgages are considerably lower than the rent for the same unit. I have a hard time paying down the mortgage because I plan on making them rentals. In Florida the interest, taxes and insurance on a rental properties is 100% deductible. I would definitely agree that big homes aren’t great investments. Renting a big home is definitely more beneficial than purchasing one.
Buying small homes for under $150k with the plans to rent them out makes good sense most of the time. Trying to rent a expensive home becomes much more difficult. Buying the McMansion does not make sense for those on FIRE but alas here we are. Maybe in 5 years we will sell and rent another home. Then I will truly be debt free!
We are in our first year of homeownership and while we have had maintenance issues come up here and there, luckily we haven’t had anything that has been too severe. We definitely bought a house well under our budget so that we would be able to maintain savings and home maintenance fund specifically for the unexpected. We’ll see if were still singing the same tune in 5-10 years 😉
That is the right idea. Buying well within your means. We bought a little more then I wanted but I think in the long run it will pan out. For now we enjoy a beautiful wine country sunset view every evening. I remind myself that the cost is for the view more then the home. If and when I go to part time, we will reevaluate the math for whether it is worth sticking in the same home.
I bought my first house 39 years ago for just over one years pay. It was a small 1400 sq ft basic house with an acre of land and hundreds of acres of woods on three sides that we didn’t own but are free to use. My wife and I are still in the same house, although it is now closer to 3000 sq ft and has a garage, a back screened porch, a second story with two bedrooms and baths which were all added in later remodels/additions. We cash flowed or refinanced all of those so we might have $100,000 invested in it through the years. It has been paid for in full for over ten years and has a lot of great memories of good times raising our three children now grown and out on their own. Since I stayed with one company until I retired at 60 it has been the best money we ever spent. However not many people enjoy a thirty plus year career at one company today so I understand that homeownership is a completely different problem to analyse now. We bought a very small house and let it grow as our incomes and family grew. That isn’t always possible either but it worked for us. Now it might be worth $200,000 but that is an insignificant part of our net worth so that really doesn’t matter. We never considered it to be a financial investment, just an investment in our family.
That is a great story and one that I suspect others share. If you know you will be in one place for a long time, then it is definitely worth the purchase. Particularly if you can get such a private location as yours. If you may move in the next few years, then buying is a bad idea. There are even more costs on the front end because once you move in all the broken items become apparent and the money starts flowing out.
I’m so sorry to hear that you have spent so much on home maintenance. Home maintenance is something I cringe at. Mr. FAF and I live more than 10 hours away from each other. Whenever something at our house breaks, I will have to either learn how to fix it myself or drop at least $100 on a maintenance guy.
I get frustrated easily when I can’t figure out how to fix something but don’t want to spend so much on a repair. Then I get mad at Mr. FAF for leaving me in this situation. It’s a vicious cycle. But yes, I FREAK OUT whenever something at our house is not working properly.
It is a vicious cycle. Some things I do myself. For instance last Saturday the toilet started whistling ever time it was flushed. I looked on line and ran to home depot to buy a new valve. $15 and 30 minutes later it was fixed.
For other things (changing out faucets which also recently needed to be done or electrical work) I call in some help. I think as my son gets older I will have more time to do home maintenance.
There are definitely hidden costs to homeownership and they can be expensive if they aren’t accounted for.
Something the banks and realtors don’t like to talk about when they find you a mortgage/home. Even the inspectors don’t find all the kinks. I think it is a good idea to account for a 10 to 20% fund for the initial period in ah one to fix those unknown problems.
In my 30’s and have been a lifelong renter (granted most of that time was spent in school/training, so renting made sense). Nevertheless, I understand buy vs rent is a personal and maybe even emotional decision, but I have yet to gain any desire or need to buy a house, though I can certainly think of situations where that may change. I view my rent as payment for a place to live, not throwing money away. The expenses are predictable and all the other “benefits” that others use to rationalize that buying is better than renting, I just don’t find to be necessarily true. All the horror stories I hear from renting, I find similar stories from homeowners. In the end it’s what works for you and makes you happy.
I think there are a lot of renters who make a very active choice to do so. I do not consider renting as throwing away money as you are paying someone to deal with maintenance and sometimes get access to a pool or gym for it also. Plus some of our best friends were people we met when we rented. Funny how apartment complexes make it easier to meet neighbors.
Interesting breakdown! I’m with you on the unexpected costs of homeownership. It seems like there’s always something to fox, improve, or do around the house.
The one thing I love about my mortgage is how much of the payment goes to interest vs. principal. Back when I had a 30 year the ratio was terrible-so much more paid in interest than went to paying down the loan. Now with a 15 year, more than 67% of my payment goes to principal.
67% That is great. We debated a 15 year loan but for now stuck with the arm. I think in 7 years I will likely switch to a 15 year (if we are still here) and have this baby paid off in a total of 22 years. The other option is to downsize our home in a few years if the size of our family does not grow.
I am hoping (and assuming) the maintenance costs are high during the initial move in period because we are finding the things that are broken. Hopefully the next 6 months will be cheaper.