I have been in my house for about two years now and I can say with great confidence that I know far more about what it costs to own a house than when I bought the house. Unfortunately, it was far more than what I had estimated as a first time home buyer. Almost everyone knows about the principal and interest that you need to pay on the loan you take to buy the house. This is the largest component of the monthly payment but there are all these little talked about costs that still can add up to be substantial. It is important to know about the total costs to own the house because this is what is used to estimate the house you can afford to buy using all the thumb rules out there. Given how important this is and to avoid unpleasant surprises, I would like to share all the different costs of owning a house. Let us see what the Wealth Wise Owl has to say.
If you want to jump to a particular cost use the links below
- Principal and Interest payment
- Property Taxes
- Home Owners Insurance
- Primate Mortgage Insurance (PMI)
- Home Owners Association (HOA) fees
- Maintenance Cost
- Home Security Plan
- Pest Control treatment
Download your own free copy of monthly expense calculator for owning a house
Conversations with Wealth Wise Owl
Hello good friend! How is the weather up there? I cannot believe you can survive this heat without air conditioning.
Hellooo..Yes, it has been hotter than usual these days but the natural cooling I get on the trees helps a lot. I can imagine the huge electricity bills you would be getting on hot days like these.
You got that right! I am too scared to look at my electricity bill these days because it just adds on to everything else that I need to keep track of and make sure I am not going over budget. I don’t think I knew what my monthly expenses would be when I bought the house.
It is difficult to know how much it costs to own a house if you are a first time buyer so don’t beat yourself up on that. The best you can do is come up with an estimate so that you are not too far off in your budget.
I would have given an arm and a leg to get an estimate on that costs but I was so hung up on the mortgage payment that I did not even think about everything else. Even though it is too late for me, I would still like to know how you would estimate the housing costs. I feel it could prove useful if I decide to move or relocate to a different place.
We can definitely go through all the items that add up to your expenses of owning and maintaining a house. https://myhome.freddiemac.com/blog/homeownership/20210917-7-parts-mortgage-payment
Let’s start with the most obvious expense once you secure a loan for the house i.e. principal and interest.
1. Principal and Interest: This is the largest component of your monthly mortgage payment and one of the first things you will get to know when you start the house buying process. These amounts are calculated based on the amount of loan you get, the interest rate and the time period to repay the loan. [For a simple calculator for principal and interest check out this free resource] The principal component of this payment is used to pay down your loan whereas the interest is just the money you have to pay the lender for offering you the loan. Both these components change when you refinance your loan. [Check out this post on how to decide if the time is right to refinance and which option to choose] What you will find interesting is that majority of the mortgage payment you make in the initial years goes towards paying the interest on the loan. So, your equity in the house does not start to build up until much later in your loan repayment journey. To understand this, look at the amortization schedule which shows how much interest you are paying each month. It will not feel nice to realize that all you are paying is interest initially but that is how the lenders make money and de-risk the loans.
Yes, I could understand this being the most basic expense as I have to do it for my car loan too. I will play around with the calculator for sure and see the amount of interest I will end up paying on a house loan because I have heard that there is a 30 year mortgage, which seems like a lifetime! I can see why being a lender is so profitable and why there are so many companies after you to get a mortgage with them.
Indeed, debt is what makes the US economy roll and housing is a big part of it. Another part of housing cost that makes the government and local authorities roll is property taxes.
2. Property Taxes: You need to pay property taxes on an annual basis. However, if you have an escrow account then the lender breaks this down into twelve monthly payments and you pay that as part of your monthly mortgage payment. The lender then collects your money in the escrow amount and pays the taxes on your behalf when they are due. The property taxes are a percentage of your house price and this percentage or tax rate is dependent on the area you live in. The tax rate is a combination of all the taxes that are levied by your local county, city and school district based on the revenue they need to provide community services and this changes every year. Your house price is also assessed every year by an assessor/appraiser employed by the county/district and you get notified of this via mail along with the property taxes you are charged.
Let’s say that your county imposes a tax rate of 0.2%, the school district imposes a 0.5% tax rate and the city requires a 0.7% rate. Then the total property tax rate you need to pay would be 0.2+0.5+0.7 = 1.4%. Typically you can search for the total property tax rate for your area on google or contact your community center.
If the property value of your house is assessed at $400,000. Then total property taxes you need to pay are 1.4% of $400,000 = $5,600. If you have an escrow account then the monthly charge that will be part of your mortgage payment will be $5,600/12 = $467.
https://www.investopedia.com/articles/tax/09/calculate-property-tax.asp
That is interesting! Everybody has a share in these taxes and it all adds up to a monthly payment. I lose track of all the different taxes that I need to pay while investing (Check out this post to find out the taxes you need to pay on selling investments), and this adds another one to my list if I buy a house!
Yes, I am glad you still remember we talked about the taxes related to the capital gains while selling stocks/bonds/ETFs, etc. Property taxes are something that you will have to pay till you own the property and is less complicated than the taxes on selling investments. Now that we have helped the lending and governing agencies, next is the insurance industry. There are two insurance related expenses that you need to account for:
3. Homeowners insurance : This is an annual premium you need to pay to insure your house against different type of damages. This premium depends on the coverage you apply for and the deductibles just like an auto insurance. This too like the property taxes is divided into twelve equal monthly payments and included in your monthly mortgage payment if you have an escrow account. This amount also changes every year as the insurance company assesses the premium based on their criteria. There is no good way to estimate the home insurance premium besides getting quotes from multiple companies. However, you can use the estimate from this website to get a ballpark number based on the cost of your home.
https://www.nerdwallet.com/article/insurance/average-homeowners-insurance-cost
4. Private Mortgage Insurance : If you do not make at least 20% down payment then there is something called Private Mortgage Insurance that you need to pay as part of your mortgage. This basically is an insurance policy for the lender that you are paying for because your loan is deemed as a higher risk due to lower down payment. The amount of PMI you need to pay depends on several factors like your credit score, loan amount, downpayment, etc. The way your monthly PMI is calculated is that the lender selects a provider for the insurance and based on your information a percentage is provided. This percentage is typically between 0.2 to 2.5% and is multiplied by the loan amount to get an annual premium for the insurance. A monthly PMI is then calculated by dividing the annual premium by 12. For example, if you purchase a $400,000 house and make a 10% downpayment then your loan amount will be $360,000. You would have to pay PMI since the downpayment was lower than 20%. Say, based on your details, the PMI percentage is 1%. Then, the monthly payment will be (1%*$360,000/12) i..e. $300. There are several online calculators that can estimate the monthly PMI based on your details.
I was complaining about the different types of taxes that I need to track but I think insurance takes the cake in that department. Every aspect of my life involves insurance so I am not surprised that there is one related to the house. I will keep these in mind and try to avoid the PMI if possible.
Yes, it will be good to avoid paying the PMI but if you cannot do not worry because you can get rid of the PMI as you build up equity in your house over time. When your loan to value ratio in the house goes below 80%, then you can ask your lender to eliminate the PMI unless they do it automatically. The next expense that is significant is the HOA fees, which is a cost for all the amenities you enjoy and lovely landscaping you drive through.
5. Home Owners Association (HOA) fees : A lot of communities where there are parks, swimming pools or other shared amenities will usually have a HOA fees. HOA is an organization within the community that sets rules for the community and maintains the public amenities that includes landscaping and maintenance. These fees are paid either monthly, quarterly or annually and can vary based on your community. The average cost of HOA is $170/month but can vary from $100 to $1000 every month.
I have seen some amazing communities in my neighborhood with huge parks, state-of-the art pools and gyms, and I always wondered who pays for all that stuff. I finally have the answer! I might just go to these amenities every day if I am paying so much and that will be the best way to get me to the gym everyday!
If this truly makes you go to parks and gyms everyday, I am sure the amount you are paying is nothing compared to the physical and mental health benefits you get!
Most of the costs we talked about are mandatory costs of owning a home. However, there are some discretionary costs that you would have to consider after you purchase the house. These are less talked about as they are not mandatory but nevertheless can be significant.
6. Maintenance costs : House like any other use assets goes through wear and tear, which requires regular upkeep. This differs from being in a rented place, where the landlord is responsible for all repairs and maintenance. If you own the house then it is always good to budget for the maintenance (including lawn care and landscaping) and emergency repairs. A rule of thumb is to expect 1% of your house price as the annual cost of maintenance if it’s a relatively new house (<5 years). But if it is an older house (>10 years) then you might want to budget for about 4% of the house price. If you don’t end up spending all the money you budgeted for, it is still good to save it in an emergency fund for house repair which can also be used for replacement of major equipment like a HVAC, roof, etc. For details of major replacement costs and when they will occur can be found in this link. You can plan ahead and based on how old the equipment in your house is, you can start putting some money away every month is a high yield savings account to save upto the repair costs. For example, based on the link, average cost to replace a HVAC system can be between $5000 – $11,0000, so we can assume an amount of $8,000 to be reasonable. It also says that the HVAC might need to be replaced in 7-15 years time, so to be conservative, let’s say you will need to replace the HVAC when it is 7 years old. So, if a new HVAC system was installed in your house 2 years ago, then you have 5 years more to replace it. In those 5 years, you need to save $8,000 which means a saving of $1,600 every year or $133/month. You can create a list of all the major equipment in the house and create a savings rate for each based on the timeline for replacement.
7. Home security : Security is peace of mind knowing that you and your family are protected from break-ins, fire, etc. All this can be taken care of by home security systems. A typical home security system would involve installation of cameras at several locations at your house to cover all the entry points, doorbell camera to check before letting someone in and monitoring by a third party company to intervene if something happens while you are away. The home security system you choose will decide the price you need to pay but it will mostly be the one time installation costs of all the equipment and monthly cost of monitoring by a security company if you chose to go with that option. A typical installation cost can be about $600 and the monthly monitoring cost can be around $40.
https://www.forbes.com/home-improvement/home-security/home-security-system-cost
https://www.forbes.com/home-improvement/home-security/home-security-system-cost
8. Pest and rodent control : Depending on the area you live in and significant the issue of pests, mosquitoes or rodents is, you might want to hire a company to do quarterly treatment of your house that prevents all the unwanted creatures from entering your home. These companies usually have free visits to take care of an ant hill or a wasp nest or any other pest related issue you encounter. The quarterly cost of treatment, which includes the free visits, is about $150/quarter.
https://www.marketwatch.com/guides/home-improvement/pest-control-cost/
Wow, these are all practical things to consider in the expenses and I guess if I did not know all this, it would have been an unpleasant surprise. I am sure the home security and pest control is something I will go for to get a peace of mind. Considering there are 100 other things that I am already handling, it will be good to outsource a few. On the same note, it will be nice to also have some company handle the maintenance of all the major equipment in the house. I am so glad we talked about this because it gives me confidence to budget properly when I decide to buy a house. Thank you my friend!
Of Course! It is always a pleasure to chat with you and share information. I look forward to your house warming party and many more dinners in the house you buy. You need to budget for that too!
