Transcription
Homes are stupidly expensive nowadays, they say that a home is the biggest purchase you're ever going to make in your life, and they are not kidding. But as it turns out, it's not just the initial purchase that can be mind-bogglingly expensive. It's also the ongoing and hidden costs of home ownership that can drain your wallet if you're not careful.
So today, let's talk about the true costs of home ownership. But before we get going, be sure to like this video if you haven't already, as it really does help out the channel a lot, and subscribe with notifications on for more money-related videos like this one every single week. And if you want to further support this channel, you can check out some of the links I've left in the description below, which includes a link to the investing platform M1 Finance. Get started investing for free today.
The first and often biggest upfront expense of home ownership is the down payment that you need to make to buy the house. The general rule of thumb for how much you should put down on a home is 20% of the purchase price. Putting down anything less than 20% will often lead to you having to pay for private mortgage insurance, or PMI. And PMI can cost anywhere from a half a percent to two and a quarter percent, or even more, of the original loan amount each year, and is basically a way for the lender to protect themselves from losing all the money they gave you to buy the home if you're unable to make your mortgage payments for some reason in the future.
So, consider if you bought a $330,000 home, which is right about the median price for a new single-family home in the United States, at least at the time of this writing. And let's say you put 10% down on it, you make a down payment of $33,000 and would likely have a PMI payment of somewhere between $125 to $555 a month. And depending on the type of loan you have, that PMI payment could stick with you until you have built at least 20% equity in your home, or possibly even the entire length of the loan.
But there's a couple of other things to note here. First, let's assume that that mortgage was a 30-year mortgage with a 4% interest rate. You could be making PMI payments for as much as six or seven years, for a total of anywhere from $9,000 to $46,000 in PMI payments. But because you had a smaller down payment on the home to begin with, your original loan amount was for a larger amount, which means over the course of that loan, you might be paying an extra $8,000 or $9,000 in interest payments above and beyond the PMI. So definitely something worth considering.
The second upfront expense of home ownership are the closing costs associated with buying the home, or selling the home, for that matter. Closing costs for buyers encompass a lot of things, and not every buyer will have to pay for all of the fees, as some of them are only relevant in certain situations, and others can be negotiated. But just to give you an idea on a few things you might see: there are costs associated with the mortgage loan itself. These can include a loan origination fee of about 1% of the sales price in the home. If you have PMI, you may need to pay a full year's worth of the premiums upfront, as well as a little extra for the PMI application. Often, you'll have to fund an escrow account with a couple months' worth of payments to cover things like your property taxes, home assessments, and insurance. You can opt to pay for discount points on your loan, which can lower the interest rate you'll have to pay, but of course, cost money upfront. There's often application and appraisal fees, which often cost a few hundred dollars apiece. Prepaid interest charges are common to cover the accrued interest between your mortgage closing date and the date of your first mortgage payment.
Beyond the loan cost, there's also costs associated with the title of the home. This includes a few hundred dollars to cover the title search, which is there to insure that there's no unpaid mortgages or tax liens on the property you're buying, so it's very important to get that. What about half a percent to 1% of the purchase price for title insurance, and depending on the laws in your area, possibly some attorney, recording, or notary fees as well? Those can add up to anything from a few hundred dollars to a couple thousand dollars, depending on the situation.
Some other common costs associated with closing on a home are the appraisals and various inspections you may have to do for things like pests, lead paint, and the home itself. Those can often run a few hundred dollars apiece. Escrow and HOA transfer fees vary from place to place. Commissions are often paid for by the seller, but depending on how you negotiated, you may end up paying for some of those as well. And junk fees should be negotiated by your real estate professional, but if not, they might be there too. All in all, the general rule of thumb for buyers' closing costs are 2% to 5% of the purchase price of the house. So for that $330,000 home we used earlier, you could be paying anywhere from $6,600 to $16,500 in closing costs.
Sellers also have to pay closing costs, but these are often just deducted from the profits they make on the sale of the house, so they don't usually have to bring cash out of their own pockets to closing. However, like I said, closing costs for the seller are usually a bit higher than for the buyer because, in addition to the various taxes and fees they have to pay, they usually have to cover commissions for both real estate agents, again, assuming this wasn't negotiated in some other way. But by itself, the commissions for the real estate agents often adds up to about 6% of the sale price of the home. Based on my research, the general rule of thumb that I saw most often for closing costs for the seller is anywhere from 8% to maybe 10% of the sales price of the home.
The final notable upfront costs to buying a home are the various moving, furnishing, potential immediate repair, and/or renovation costs. These are almost impossible to get a solid estimate on, to be perfectly honest, because there's so much variance in our own personal tastes and schedules. For example, even after buying pizza, moving might only cost a couple hundred dollars if you have friends willing to help you move and you aren't moving too far away. But if you need to pay professionals to help you move, or you need to have stuff in storage for a while first, it could cost a bit more. The same idea holds true for furnishings, renovations, and repairs. Obviously, if you see something that's going to need repairs right away, you may be able to have the seller pay to have that fixed before you buy the home, or at least negotiate it into the sales price. However, if you're going to be getting new furnishings for the house, or upgrading the appliances, or renovating the kitchen, or something, the costs can grow considerably larger. So, like I said, it's difficult to give a truly solid estimate on these costs, but they are definitely worth considering when making your decision to buy a new home.
With that being said, let's move along to the various ongoing costs associated with owning a home. We all know the most common one is the mortgage payment, but there's more to owning a home than just the mortgage payment. There's maintenance and repair bills to save for, potentially remodels to do from time to time, property taxes to pay for, home insurance to buy, and utilities to get.
So, first, of course, the mortgage payment. This is usually the largest portion of your ongoing housing costs and can often cost as much as $1,000 a month or more. Depending on what type of mortgage you get, your monthly payment can change quite drastically, but so can the amount of interest that you pay over the course of your loan. Most common types of mortgage loans are the 30-year fixed mortgage and the 15-year fixed mortgage. Take our $330,000 home with a 4% interest rate. If we made a 20% down payment, our starting mortgage balance would be about $264,000. Our mortgage payment would be about $1,260 a month, assuming it was a 30-year fixed-rate mortgage, and it would be about $1,950 a month if we chose to get a 15-year mortgage. In total, we would pay about $87,500 in interest with a 15-year mortgage, but nearly $190,000 in interest with a 30-year mortgage. That is assuming we don't do anything to save money on our mortgage. And if you want to learn more about doing that, you can check out my earlier video on how to save $100,000 on a mortgage at the link in the video description or the card in the upper right-hand corner of your screen.
The next ongoing cost of home ownership is the maintenance and repair costs that come up from time to time on the home. There are a couple of general rules of thumb with this one. The first, and the one that I've heard most commonly, is that you should expect to pay anywhere from 1% to 4% of the value of your home every year on maintenance and repair costs. As you would imagine, older homes with older appliances and materials usually end up a little bit more towards the higher end of that estimate, while newer and very well-maintained homes often start out towards the lower end of that estimate. The second rule of thumb is similar, but focuses on the size of your home by saying that you should expect to pay anywhere from $1 to $4 per square foot per year in maintenance and repair costs.
Personally, for me, I like to combine these two rules of thumb for my estimate, mainly just because I'm a cautious guy when it comes to finance. There are some areas in the country where you can find fairly large houses listed for comparatively low prices. This can also happen if you're fortunate enough to be buying when the market is down. But in reality, buying a home in the middle of nowhere for a lower price per square foot probably doesn't help you lower your ongoing maintenance cost by that much. So when doing my estimates, I usually take the greater of those two rules of thumb as my estimate. So, for example, if our $330,000 home was a brand-new, 2,500 square foot place, I would assume that the lower end of the estimates would be most likely relevant. Therefore, I'd take maybe $1 or $2 per square foot, or 1% to 2% of the home's value per year in maintenance. This would give me somewhere in the neighborhood of $2,500 to $5,000 per year for the price per square foot estimate, and $3,300 to $6,600 per year for the percentage estimate. I would then take the higher of those two estimates and use that for my budget. In this case, it would probably be the $6,600 per year.
Of course, even when combining these rules of thumb, they are just that, rules of thumb. There's a lot of nuance that goes into estimating the actual costs of maintenance and repairs, and sometimes surprises come up. Maybe you have a major plumbing problem that nobody caught, and it costs $10,000 or $20,000. It's not common, but it happens. So, if you're seriously looking at buying a place, try your best to get an idea of how old various appliances are and other high-cost items, such as the roof, so that you can get a more accurate picture when these things will need to be fixed or replaced, and how much that's likely to cost you. Again, with something this big, the rules of thumb should really just be a jumping-off point.
Remodeling and other home improvement related expenses is a cost that's often forgotten about with many online cost calculators, but it can add up pretty quickly for many people. In fact, according to HomeAdvisor's 2019 State of Home Spending Survey, the average household spends about $7,560 a year, over $600 a month, on various remodel and home-improvement costs. This was a 17% increase over the numbers found in the 2018 study. And while that number is likely dragged up, at least a bit, due to people who buy houses on the cheap, remodel and renovate them, and then flip them, it wouldn't surprise me if the typical household, outside of that niche, still spends at least a few thousand dollars a year, if not more, on home improvements. Though that is just an assumption on my part based on my own experiences, which I'm a data point of one, so I could be way off. Maybe I'm the weird one. Let me know in the comments section below what you think a reasonable estimate for remodeling and home improvement costs would be.
But anyway, to give you some examples as to how quickly these intermittent costs can add up, especially if you're not doing them yourself, here are some figures for common home improvement projects, according to data gathered by remodelingcalculator.org. Most homeowners spend between $5,000 and $13,000 for a bathroom remodel. Low-end remodels can be done for as little as a few thousand dollars, while some of the higher-end stuff can cost over $20,000. Most homeowners spend between $6,700 and $19,000 for a kitchen remodel, though this can become much, much, much more expensive depending on the size of your kitchen and what exactly you want to do. $30,000 for a larger or higher-end kitchen is not altogether unheard of. Home additions are obviously not something that just anybody is going to do, but for those who have it, it can cost a pretty penny. Most homeowners spend between $46,500 and $87,500 on home additions, with some of the larger and more elaborate additions costing well over six figures. Even seemingly smaller improvements, such as painting the interior of your home, can end up costing anywhere from a few hundred dollars to as much as a thousand dollars or more, depending on how many rooms you're painting, the condition of those rooms, and whether or not you're hiring a professional. According to the data from HomeAdvisor, you can expect to pay anywhere from $2 to $6 per square foot when all is said and done.
And the home improvements don't just stop with the interior stuff. Some people want to spruce up the outdoor space as well. Adding decks can be between $15 and $35 per square foot on average, depending on the quality of the material used in construction. And according to homeguide.com, a typical deck costs between $3,500 and $8,500 when all is said and done. If we assume that you end up remodeling a room once every few years, along with doing a couple extra projects to get your home ready to sell at the end of things, you can see how these costs can add up pretty quickly and are definitely worth taking into consideration, even if you do end up making most of your money back with the profits from the sale.
But moving along, property tax rates vary from place to place and are usually based on the assessed value of your home. You can often get a general idea of your local property tax rates by looking at a calculator online. According to WalletHub, the average property tax rate can vary from anywhere from about a quarter of a percent to about two and a half percent, depending on where you live. For a $330,000 home, that could mean paying anywhere from $825 a year to $8,250 a year in property taxes.
Homeowners insurance can vary from place to place as well, and even home to home, depending on how much coverage you want and what deductibles you're willing to have, among other factors. But a general rule of thumb is to expect to pay roughly 0.5% of the replacement cost to your home per year in insurance, although I have seen this go noticeably higher. For our $330,000 home, this would mean annual premiums of about $1,650.
Utilities are the final major ongoing cost associated with home ownership and can vary quite substantially depending on how energy-efficient the home is, the time of year, and of course, the habits of the people living in the home itself. So, I'm not even gonna try and ballpark that one. You've probably got a pretty good idea of what utilities cost you every month. The point is, they're an ongoing cost that shouldn't be forgotten.
Finally, the last portion of the true cost of home ownership is the hidden cost of home ownership. The hidden cost is basically the opportunity costs of owning a home. And the opportunity cost is simply the loss of any potential gains you could have received from other choices you could have made when the path you actually take is chosen. So, for example, if you spend $5 on a latte tomorrow, you can't then turn around and invest those same $5 in the stock market. Whatever potential returns you could have gotten from that investment in the stock market is the opportunity cost of that latte.
So, when we look at the upfront expenses of home ownership compared to the upfront expenses of other forms of shelter, there's probably going to be at least some sort of a difference. In our example, we had a $330,000 home. If we made a 20% down payment and paid 5% in closing costs, our upfront costs would have been about $82,500, assuming no immediate furnishings, maintenance, or repairs were needed. If we rented somewhere for, say, $2,500 a month, our upfront costs might have only been the security deposit, maybe one month's worth of expenses. That would be a difference of about $80,000 in upfront costs. If we hypothetically decided to invest that $80,000 into the stock market and made 8% per year on average, we'd earn about $6,400 in interest that first year. That's also an opportunity cost. You could do the same calculations comparing the ongoing costs as well.
In this hypothetical case, we have ongoing costs of $2,500 a month in rent, plus any utilities we pay for and insurance we might have. Just for the sake of this example, let's say utilities are $200 a month and renter's insurance is $15 a month. Therefore, our ongoing costs for the first year would be about $2,715 a month. We'd have about $80,000 in investments earning us about $533 a month on average. That makes our net cost $2,182 a month for rent.
If we use the numbers we used earlier in this video for our housing costs, our monthly budget in this particular hypothetical example would look something like this: $1,260 a month for our 30-year mortgage, $275 a month in maintenance and repair costs, maybe something like $300 a month in home improvement costs, about $140 a month in home insurance premiums. I'll assume a 1% tax rate for this hypothetical example, which would mean another $275 a month in property taxes, and just to keep things even, let's say $200 a month in utilities, just like the rental. That's a total monthly budget of about $2,450 a month. That's a little higher than our net cost of renting, anyway, but not by too much. Obviously, the cost of renting will go up over time, and that's something to be considered. But so will our non-mortgage related housing costs, which is also something to be considered. As we saw, the average amount spent on remodeling costs for the home went up 17% between 2018 and 2019, according to HomeAdvisor.
But that leaves us with two questions: First, from a purely financial perspective, is buying a home worth it? And second, even if it isn't, are there still good reasons to settle down despite the comparatively higher costs? The answer to the first question could really go either way. It depends heavily on the numbers for your situation, and I'll likely explore that further in a video in the future. The answer to the second question is absolutely yes, especially for the right person. I may also do a video on that in the future. But the fact of the matter remains, there are some people that would have huge lifestyle benefits from moving from an apartment to a house, and that may more than make up for the difference in costs, even if, like I said, the cost of home ownership in their area is higher than the cost of renting.
But that'll do it for me today. Once again, if you enjoyed this video, be sure to smash that like button if you haven't already. Subscribe and hit that bell next to my name, you'll be notified of all my future uploads. I generally upload every single Monday. And if you have a friend that would be interested in this kind of content, be sure to share it with them. Let's really get this information out there and start our own financial revolution.