As you think of buying a home, you may have visions of a white picket fence and a front-yard tree perfect for a tire swing—complete with a bird’s nest full of warbling babies. And shiplap as far as the eye can see, thanks to Joanna Gaines.
We don’t want to burst your dream home bubble. Don’t stop believing in those beautiful baby birds. But in order to make that dream come true, you need to walk into the whole home-buying situation with eyes wide open. That means counting the costs. Literally.
Well, how much does it cost to own a house? Let’s pull back the curtains and find out.
What Are the Costs of Owning a Home?
How about we unpack a few of the most important expenses to consider as you look into the wonderful world of home ownership.
Most people think of the word “mortgage” as just a lump of money you give the bank to pay off your house. But it’s more than a lump. When you pay your monthly mortgage, that money goes toward the principal, interest, property taxes, insurance, and possibly PMI (private mortgage insurance).
What are those five things? We’re glad you asked, because we planned to tell you.
Principal: The principal is the amount you borrowed to buy your house. So when you pay on the principal of your home, the amount you owe on the house goes down. Your goal is to get the principal down to zero—meaning you 100% own your home, mortgage-free.
Interest: The interest is the money the lender is making. Paying this doesn’t lower the amount you borrowed, but it is the cost of borrowing.
Property Tax: Most mortgages include your property tax in the monthly payment. The lender will set aside a portion of your payment in a separate “escrow” account and pay those taxes for you when they’re due.
Insurance: The monthly mortgage payment can also include your homeowner's insurance. Just like with the property taxes, the lender handles that payment for you.
Private Mortgage Insurance: In the event of a foreclosure, the bank can often get around 80% of the home’s value. So if you don’t give them the other 20% up front as your down payment, they add on PMI to protect themselves.
All five of those things together shouldn’t be more than 25% of your take-home pay. When you start spending more than 25% here, you become “house poor,” meaning your house might be awesome, but the rest of your life suffers financially. Who wants to live in a three-story house with no furniture or a have a gourmet kitchen with no money to buy groceries?
Those may seem like extreme examples, but being house poor can put you at extreme risk later on.
As you look at those pieces of the mortgage-payment puzzle, remember these main takeaways:
Some neighborhoods or complexes have homeowners’ associations. Those associations generally have monthly fees. The bad part about HOAs is that some are poorly managed. Ask your real estate agent to do some digging for you so you’ll know what you’re getting into.
The good of HOAs is that this group is in charge of maintaining and improving the shared properties. Maybe your HOA fee covers your use of awesome amenities like a pool, playground, pet spa, landscaped walking trail, or the like.
Someone’s got to take care of those things, and someone’s got to pay for it. Everyone in the neighborhood splits the costs with HOA fees. Make sure you know this cost before you buy.
Natural gas, electricity, water, trash collection, internet, and television streaming services: These are some of the most common utilities.
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Of course, not all of those are necessities, but have them in mind as you budget. You might already be paying for these as you’re renting, but sometimes your rent includes a couple utilities.
Also remember that if you’re up-sizing, several of those bills will increase. It costs more to heat and cool a three-bedroom, two-bath bungalow than it does a studio apartment, for example.
If you’re moving somewhere with a lawn, you’ll need a maintenance plan. Are you going to mow or hire a crew? Will your obsession with coral-colored roses be a constant temptation as you wish to spend half your paycheck on a garden the Queen of Hearts herself would envy?
While the roses can wait, you don’t want to make enemies of the neighborhood by growing your grass miles high. Plan on a reasonable amount of money going toward lawn care.
Home Maintenance and Repairs
When you own rather than rent, one of the biggest adjustments is home maintenance and repairs. They become your problem. No more ringing up the landlord when a family of skunks moves under your deck or your HVAC goes kaput on a sweltering summer day.
Those are now on you. You get to call pest control or that local air company who got past copyright issues and named their company Mr. Freeze. And you get to pay the bill.
From gutters to garage doors, roofs to refrigerators, toilets to termites, your housing budget will look different when you make the move to home ownership.
But if you’re ready, don’t be wary. We are a budgeting tool, after all—budgets are our jam. Here are three tips for how you can make your budget home-owning-ready.
With the right agent, taking on the housing market can be easy.
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How to Budget for Home Ownership
1. Keep an emergency fund for surprises.
If you don’t already have one, you need an emergency fund. Start by saving up $1,000, then pay off all your debt, then build that emergency fund up to enough money to cover three to six months of expenses.
The thing with surprises is you don’t know when they’ll happen. But you do know surprises will happen. That’s what your emergency fund is all about—being cash-ready to meet those surprises.
2. Create sinking funds for semiannual expenses or repairs.
Here’s the thing: Some of those repairs and home maintenance issues mentioned in the previous point really aren’t surprises. When you own a home, you need to regularly inspect appliances and other aspects of your home so you can know what will need some financial attention soon.
For the repairs and replacements you see coming, as well as the semiannual expenses (like a quarterly bill for pest control), you can set up a sinking fund in EveryDollar. Calculate how much money you need by when, divide it by the months until that time, and start stashing cash in the fund in preparation.
Sinking funds are easy in the EveryDollar app or on the desktop version, and they’ll keep your emergency fund from being used on non-emergencies!
3. Have budget lines for the monthly home expenses.
For all the steady, monthly expenses—like your mortgage payment, water bill, electricity, natural gas, and such—you need to set up separate lines in your budget. If you’re doing this for the first time, look back at your bank statements to see the average bill for each, and put that in as the planned amount.
Budgeting for each of these expenses keeps you from spending your light-bill money on laser tag by accident. Once you’ve got housing and utilities covered, budget for food and transportation—then you can spend what’s extra on money goals and fun.
Now you’ve got the knowledge you need to be financially ready to buy a home. Next, you need someone in your corner to help you make the best choices along the way.
But how do you find a trustworthy real estate agent you can count on to keep your best interests at heart? Get a RamseyTrusted agent. They’re experts in the field—the best of the best in your area—and we’ve checked them through and through so you don’t have to.
You can focus on the fence, baby birds, tire swing, shiplap—oh, and that awesome down payment. Your RamseyTrusted real estate agent will focus on getting you the best deal on your new home!