What’s the true cost to own a home?
If you’re in the market to buy a home, there’s the sale price of course, but what are all of the little (and big) costs that will make up the total cost of ownership? Let’s dive into it, so you can see what the true cost to own a home is.
Why should you know the true cost to own a home?
For a purchase like a home that is a big ticket item, that you are probably going to keep for a number of years, it pays to be aware of the aggregate (total) costs. That way, you can plan and budget for your expenses, instead of being taken by surprise. Also, by evaluating the true cost to own a home, you can compare one home better to another and make a more sound financial decision. One may have a lower sales price, but a higher true cost of ownership, for example, ultimately costing you more money.
When is the best time to calculate the true cost to own a home?
It’s best to figure out the true cost to own before you commit to buying any one home. That is because different homes have different aggregate costs. Is the home in a pricy property tax area? Is it old and will need more repairs? Is it in a very hot climate and will require cooling year round, driving up your energy costs? There are many factors that play into the true cost of owning a home.
Is it too difficult or time consuming to calculate the true cost to own?
No, it’s actually very simple. You can do it on a napkin using lipstick to write with if you want, or just your cell phone to add it up. You’ll need to do a little prep work, which we’ll walk you through now.
Let’s get started, shall we?
What are the major categories of costs to consider?
The major categories of costs that go into a true cost to own calculation are the following: home maintenance, homeowners insurance, HOA fees, furnishings, energy costs, property tax, mortgage payment (principal and interest), down payment, pest control, and real estate and other closing fees when you sell your property.
What information is easy to collect?
If you know the home you are interested in purchasing, and you’ve explored mortgages, then the following things should be easily collectible: the estimated price you might pay for the property, the annual property taxes, the down payment you plan to make, the estimated monthly mortgage payment, and HOA fees.
Write those all down with your lipstick on the nearest napkin and let’s continue.
What information is trickier to capture?
The first trickier piece is, how much will your homeowners insurance be? There are a lot of generalities online. Often, mortgage loan officers will use a multiple of 0.25% of a monthly mortgage payment to estimate the cost of homeowners insurance. If you want to do some quick estimating, this is perfectly fine to use.
Bust out your iPhone calculator and take the estimated monthly mortgage payment of the home you want to buy and multiply it by 0.0025. Then, multiply it by 12 months. That is your estimated yearly cost of homeowners insurance. Now, write it on your napkin.
Be aware that this is not the most informed way to know how much you’ll pay. It’s the quick and dirty way. The best way is to talk to an insurance broker, as there are so many factors that make one person’s homeowners insurance sky high and others super low. These factors include: how big is your deductible? What exactly does your policy cover? Do you have liability insurance and how much? Do you have extra insurance, such as for floods or storms (read more about what type of insurance to get for storms and potential catastrophes)?
Even this isn’t that complicated or time consuming, though. An insurance broker will want your eventual business, and they make so many quotes all day long that they can give you a pretty good ballpark number based on even a short conversation. And hey, you met a new person!
And when you are ready to actually get homeowners insurance, be sure to read our guide on how to negotiate the best rate.
Similar to with home insurance, for a quick estimation of your home maintenance costs, some people say that you can use a general multiple of between 1% and 3% of your home’s cost to calculate your annual home maintenance costs. That means, for a $100,000 home, expect to pay $1,000 to $3,000 per year for home maintenance.
For a quick and dirty calculation, feel free 1 to 3% of home value as a rough estimate.
But, consider the following: what if you buy a super cheap shack that has really old major components, vs. a very expensive brand new home? The 1% estimation could be meaningless.
If you want to get a good sense of how high your home maintenance expenses might actually be, there’s a very methodical way to go about it, laid out in this recent piece, How to improve your return on investment when buying a home. It involves finding out the age and expected lifespan of your major components, and doing a thorough inspection of the home. What you don’t want to have happen is to be caught off guard with a major expense. You can avoid many major expenses, or at least be prepared for them financially, if you do some simple research and targeted inspections into the state of the home.
Miscalculating the expected maintenance on a home can turn what might have been a good investment into a bad one.
Of course, all homes require maintenance. How much you spend also depends on whether you hire someone else to do every repair, or if you are handy enough yourself to take them on. Painting, fixing things like caulk and hardware, and all the little things that crop up can add up, but there are also ways to make them less expensive, depending on how far you go (check out how I learned to caulk my own tub).
The energy costs that you will have depends on a number of factors. These include the climate that you are in, the type of heating and cooling systems you will own, how sealed the envelope of your home is (to prevent heat loss or gain), the type of energy that you will use and your lifestyle.
Of course, you won’t be able to account for your lifestyle until you get into the home and see your usage! But you can get a sense of the other costs simply by asking the owner what their costs are or, better yet, asking for a copy of their energy bill. It’s best to ask what the energy costs are in the dead of winter and also the height of the summer, so you can know the range of costs to expect.
Utility bills differ by region, both because of climate but also based on energy costs. The U.S. Energy Information Administration publishes a report on the average utility cost per state. While this won’t tell you what your energy costs will be, it will give you a sense of how the state you are buying in compares to others.
Even if your energy costs are high, you can think about ways to reduce them. Learn how to come up with a strategic energy plan, and also ways to make small changes that produce large energy savings.
How much do you plan to spend to furnish your new home? If you are moving from a small space into a large one, you may find that you need to spend some money to make your new space habitable. Of course, there are many ways to furnish a home for cheap, but you want to be realistic about your expenses.
Along with furnishings like tables and chairs, don’t forget about other items that may be necessary that are along the lines of appliances. If you have a large yard and you are moving from an apartment, you may need a lawn mower, for example. You may need to buy a microwave, or a whole host of other items that you didn’t need or have in your last home.
While typically not a huge expense, it’s an easy addition to your napkin calculations to make sure you consider annual costs of keeping pesky mice and insects away, especially termites. Plan on spending about $200 to $800 a year on pest inspections and treatment, depending on the size of your home.
Real estate and closing fees when you sell
Ok, I get it. You are not thinking about ever selling your dream home. But if you want to get technical about the true cost to own a home, then the cost of selling the property come into play.
Over time, your home will either appreciate (hopefully) or depreciate, and you’ll own a certain amount of your home in the form of home equity. Home equity is what your home is worth that you don’t owe to anyone else, like a bank.
When you sell, what you get to keep in your pocket is what you sold your home for, minus what you owe on it, minus the cost of selling your home.
A good rule of thumb for real estate and closing cost fees are that you’ll pay around 5% of the sale price to a real estate broker (if you use one, which most people do), and another 1% to 3% of the sale price, depending on where you live.
Did you get all the costs down? Congratulations! Now you have a much more informed view of the of the total cost to own any particular property.
If you are interested in making not just a good but a great real estate decision, make these simple calculations on each property you are considering, and you’ll be able to choose one that leaves the most money in your pocket.
Look at you! You’re in the big leagues now.