How Much is Your Home Costing You?

With interest rates being near all-time low rates, it’s crazy the number of people purchasing a home for the very first time. When you speak to a realtor or a mortgage broker, obviously, they are going to argue that now is a great time to buy due to the low interest rate environment we’re currently in. I wouldn’t say that they’re wrong, but it’s more of a question of

“Is the glass half full or half empty?”

Whenever you’re doing anything for the first time, it’s going to be a learning experience. No matter how good of advice you get from your friends or family, there are going to be details that even the most cautious people will overlook.

 So, let’s look at exactly how much a home is going to cost you!

1. Interest Payments.

At the beginning of owning a home, a majority of your payment is going to be paid to interest. This is due to the fact your mortgage is starting off with a high balance and until you start making more payments, your principal will decrease slowly at first.

For example, I bought my house back in 2015 for $306,000 at a 3.5% interest rate. Over that period of time, here’s the amount that I paid toward principal and interest.

As you can see, over the past 5 years, I’ve paid a little over $36,000 towards the principal and over $49,000 in interest payments. The $49,000 I’ve paid in interest is included in my monthly payments, but when you start looking at the amount of dollars, it’s crazy the amount of money it costs to own a home.

On the flip side, I purchased my house with the sole intention of renting out 3 of the 4 rooms, which helped reduce my out of pocket costs. I believe this is a great strategy, especially for a first time home buyer so that you can have someone else pay off your house, rather than you being on the hook for the entire bill.

2. Insurance and Taxes.

Not only is the interest you pay built into your monthly payment, but it will also include your home insurance and property taxes. Personally, I decided to go with an FHA loan because it allows you to put a down payment of at the very least 3.5%. I chose this option because I didn’t want to put down 20% of $306,000 which is about $61,000.

Now, since I decided to do an FHA loan option, this forced me to pay Private Mortgage Insurance for the LIFETIME of the loan. Even if your home appreciates by 10000%, the only way to get you off the hook for PMI is to do a refinance into a different loan strategy. Ultimately, this ended up costing me an additional $200/month.

PMI is different than your property taxes and insurance you need to pay to cover your home. Being I lived near the beach, my annual property taxes cost about $4500/year. I’d say for a first time homebuyer this is on the higher side of the spectrum. A good rule of thumb is to use about 1% of the home value to help you determine how much your property taxes will cost you.

That being said, in case of a catastrophe, you need to include your home insurance that covers the cost of your Dwelling. A dwelling is the actual amount it will take to rebuild your home, which doesn’t include the land your house sits on. A good rule to remember is that you never insure dirt!

My annual taxes are on a dwelling amount of $216,000, which costs $756/year. Adding up what I pay for PMI, property taxes, and insurance, my overall cost is around $7600/year or an additional $633.33 added to my monthly mortgage payment.

3. Repairs & Maintenance.

Whether you’re buying a brand new home or one that has a little bit more personality, repairs and maintenance are going to be necessary. You’re not going to find these costs on your mortgage statement, but keeping your yard looking fresh is a must on a monthly basis ($100 to $200/month).

Not only is keeping your yard a monthly chore, but you’re also going to need to pay for air filters that run about $10 to $20 each and pay for semiannual maintenance on your HVAC system, which costs around $200/year. In addition to your lawn and HVAC, don’t forget cleaning supplies as well as the amount of time (3-4 hours/month) that it takes to clean your home.           

Overall, my experience owning real estate or the sole purpose of renting out the property has been a profitable experience. I’m set to sell my house this November for a $450,000 sales price which is about a 50% increase from the $306,000 I bought it for back in 2015. It is good to remember that the most millionaires in America were created utilizing real estate and real estate has caused the most bankruptcies in America.   

Happy Slacking,

Josh, AKA "CHACHI"