As a fee-only financial advisor, I, of course, live out the same guidelines that I recommend to clients – such as eliminating debt as part of the plan – ultimately including the mortgage.
I’m a huge fan of paying off your mortgage early (my wife and I did it). For most people, their mortgage or rent payment is the largest monthly payment on their budget and not having that expense frees up a lot of cash flow during the earning years, and greatly lowers necessary expenses during retirement years.
Some people think “when the mortgage is paid off, I can live for free!” – but that isn’t quite right. There are still a decent number of expenses related to housing aside from the mortgage. In fact, when we coach people who are considering the rent vs buy option, we find that people often fall into this same trap of focusing on the mortgage payment without considering all other housing-related costs.
First-time homebuyer? Here’s a great article from Redfin with tips for first-time home buyers.
Housing-Related Costs in Your Financial Planning
So what are all the housing-related costs you need to consider and account for in your financial plan? Here are the costs that we still need to cover, even with a totally paid-for house. The types of expenses will vary (a little) based on location and situation, as will the specific costs of course. But this should give you an idea of the things to look for and make sure they are included in your planning.
1. Homeowner’s Association Dues. Not everyone has HOA dues, but most people who live in a “planned” neighborhood – where the community takes care of walking paths, green spaces, and similar things – often do have associated fees. If you live in a condo or townhouse you certainly have HOA fees, which usually covers items like insurance on the building structure, yard (if any), exterior maintenance, and such. The HOA costs where we live run $275/month, so $3,300 per year. Before we bought this place we spent time comparing HOA fees and found that they ranged from $250 to $450 per month for different communities in this area.
2. Property Taxes. When you have a conventional mortgage the lender will generally pay the property taxes for you, and the fact that many people never have to write that check means that many of them forget about it. It isn’t “free” when you have a mortgage – the lender increases the monthly payment to cover both the loan and the taxes that are estimated to be due. The property taxes on our place are a very reasonable $1300 per year. I know people in higher-tax locations (like New York and New Jersey here on the east coast) whose taxes run many thousands of dollars each year.
3. Property Insurance. When you live in a condo or townhouse it is very likely that the structural insurance is paid through the home owner’s association. Even in that case though you still need an insurance policy that covers things like a) upgrades: everything inside the drywall is usually the responsibility of the homeowner; b) personal property: everything you own – electronics, clothes, jewelry, books, household items – everything, needs to be covered in your home owner’s insurance; c) liability: if someone has an accident while on your property, you want the insurance to cover that so you aren’t personally liable. When you live in a standalone house of course your insurance will also cover the structure (so the cost will be a lot higher). Our home owner’s insurance costs us $765 per year.
4. Maintenance and Repair. Not everyone pays attention to these maintenance items, but that is almost always a mistake. Having annual checkups and service on certain home systems will help catch issues before they become bigger problems, help them run more efficiently, and in many cases, these checkups are needed to keep warranties valid. Some maintenance that we budget to have taken care of each year are: Pest control (preventative pest treatment) and heating and air conditioning checkup. We also budget a small amount of money for little repair work that may come up and for a little bit of yard upkeep (seasonal flowers mainly). We budget $460 per year total for these miscellaneous items.
5. Utilities. This may sound obvious, but I can tell you it isn’t. Oftentimes people, for whatever reason, don’t think about utilities when considering housing costs. Bigger house, higher utility bills; smaller house (or more energy efficient), lower utility bills. Sometimes when renting a place to stay they will actually include certain utilities in the monthly payment – this is often the water and basic cable. NOTE: That’s another thing to consider when weighing the costs of renting versus owning a home. Our total utilities add up to about $5,000 per year, so $417/month. That’s an average of course – summertime has higher electricity bills, and wintertime has higher gas bills.
So what’s the bottom line?
Okay, when looking at the five categories above we get $10,825 per year, which is $902 per month. Anyone else thinking “wow”? It sounds like a lot of money to me, but trust me – I’m a super-frugal-budget-nerd – so I’ve reviewed and analyzed everything as much as possible. If you consider that for less than $11,000 per year you can have comfortable shelter to live in, maybe it doesn’t sound as bad. Add food, clothing, and transportation to that and you have basic living expenses covered.
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I’m curious, how do these costs compare to the area where you live? Also, are any of the items above a “surprise” that you hadn’t thought about before when considering total housing costs?