Realistic Home Purchase and Ownership Costs

The intention of these notes is to make a realistic assessment of the real costs of purchasing and owning a home. More specifically, I’m interested in determining how much cash-on-hand is required to offset the one-time expense of purchasing a home as well as the ongoing costs of maintaining and owning the home. The information is summarized from a few different online resources, linked below.

One-Time Home Purchase Costs

One-Time Home Ownership Costs (Maintenance and Repairs)

Ongoing Home Ownership Costs (Utilities, Insurance, and Mortgage)

Resources Referenced

Nerdwallet: Cost of Homeownership Calculator

• American homeowners spent 8% of their monthly income on nonmortgage home costs, on average.
• Stats below are for the 2015 American Housing Survey by the US Census Bureau as well as some additional NerdWallet research.
  
  
• Total monthly recurring home expenses: $946
  
  
• Utilities: $373, 27% of recurring monthly nonmortgage homeowner expenses
  • Electricty: $104, 14%
  • Water: $46, 6%
  • Natural Gas: $53, 8%
  • Internet: $45, 5%
  • Cable TV: $60, 7%
  • Home Security: $40, 5%
  • Trash: $25, 3%
• Insurance: $165, 9%
  • Homeowners Insurance: $65
  • Other Insurance: $100
• Homeowners Association: $58, 7%
  • Homeowner/Condominium Association fees: $58
• Property Taxes: $150, 18%
  • Property Taxes: $150
• Maintenance: $200 (excludes repairs and home improvements as these are nonrecurring)
  • House Cleaner: $75
  • Gardener: $75
  • Pool Cleaner: $50
  • Other Maintenance: $0

HSH Article: What does owning a house really cost?

• How much is home maintenance? Some rules of thumb:
  • 1-2% of home’s value each year
    • Ex: $3K-$6K/year for $300K home
  • $1-$2 per square foot of your home per year
    • Ex: $2K-$4K/year for 2000 square foot home
  • More Detailed List of Items
• Homeowners Insurance coverage
  • PMI - mortgage insurance
  • Lender’s title insurance policy
  • Owner’s title insurance policy
  • Homeowners (hazard) insurance policy, unless you guy a condo and its included in homeowners association dues
  • Possible extra coverage for earthquakes, mud slides, tornadoes, hurricanes, tornadoes, etc, depending on region
• Homeowners Association Fees
  • Condo owners save on external building repair and maintenance, but need to pay HOA fees

Freddie Mac: Appliance Budget Worksheet

• High-End / Low-End / Average Annual Repair Budget (excludes roof/gutter): $675 / $2175 / $1425

Credible Article: How Much Does It Cost to Buy a Home?

• Upfront Costs of Buying a Home
  1. Down Payment: 3%-20% of purchase price
     • Conventional Loan: 3%
     • FHA Loan: 3.5%
     • VA Loan: 0%
     • USDA Loan: 0%
     • Jumbo Loan: 10% to 20%
  2. Closing Costs: any fees required to close on a home.
     • Typically split between buyer and seller
     • Buyers typically need to cover about 2% to 5% of the home’s purchase price
     • Specific closing costs that buyers are usually expected to cover:
       • Costs of any inspections,
       • Appraisal fees,
       • Cost of title search and insurance,
       • Loan origination fee
  3. Reserves: Mortgage companies want to ensure that you have some money left over after the home purchase.
     • Ensures you have ability to make mortgage payments, even if something happens to your income
     • Typically, they want 2 months of mortgage payments left
• Recurring Costs of Owning a Home
  1. Mortgage Payments: median mortgage payment in US is $1100/month
  2. Property Taxes: between 0% and 2.5% of the home price
     • First property tax is typically collected upfront at closing
     • Sometimes, Mortgage company will collect them as part of monthly mortgage bill
     • Other times, home buyer responsible for paying these fees themselves
  3. Mortgage Insurance: only required if less than 20% is put down
     • Costs 0.5% to 2% of loan amount, usually rolled into mortgage payment
     • Two types:
       • Private Mortgage Insurance (PMI): used with conventional loans and usually canceled after you reach 80% loan-to-value
       • Mortgage Insurance Premium (MIP): found on FHA loans
         • If loan-to-value is less than 90%, required to pay for 11 years
         • If greater than 90%, required to pay for life of the loan
  4. Homeowners Insurance
     • Helps cover costs if substantial damage happens to home
     • Mortgage company may require supplemental insurance policies for specific types of damage like flood or earthquake
     • On average, homeowners pay $67 per month
  5. HOA Fees: only for homes in a planned association or condo building
     • Average is $62 per month
  6. Utilities
     • Average American spends $202 per month on utility costs
  7. Home Maintenance
     • Rule of thumb is 1% of home’s value per year to cover maintenance

Motley Fool Article: 10 Expenses of Home Ownership You Need to Know

1. Your Mortgage Payment
2. Property Taxes

• For $250K Home, can range from as low as $675 to high as $6K
• Will be placed in escrow by lender

3. Homeowners Insurance

• PITI is combination of principal, interest, taxes, and insurance

4. Mortgage Insurance
5. Escrow Prepaids

• Escrow account doesn’t start at zero typically - need to make a deposit at closing

6. Mortgage Points

• Pay “points” on mortgage to lower the interest rate over term of the loan
• One point is equal to 1% of the loans initial principal balance
• Likely make sense if you plan to be in the home for many years and the long-term interest savings outweigh the cost of paying points

7. Closing Costs

• Generally range from 1% to 3%, but this may be much higher for low-priced homes.
• Other example closing costs:
  • Lender’s fees for origination, processing, and underwriting the loan
  • Appraisal costs
  • Title insurance
  • Deed recording fees
  • Document prep fees
  • Credit report fees

8. Utilities
9. HOA Dues

• Specifically needed for condos/townhomes
• May be expensive if it covers things like building insurance, cable, yard maintenance, etc.

10. Maintenance

• Rule of thumb is to expect maintenance expenses of about 1% of home’s value per year
• Note this can vary significantly from year-to-year
• May be much greater for older homes