Whether you’re a home owner, investor or renting, understanding cost of owning a home can provide valuable insight into your financial decision making. Homeowners and tenants can compare the cost of ownership with renting or explore the cost of up or down sizing, and investors need to compare costs with income to calculate their Return on Investment (ROI).
You may think that the answer is as simple as your monthly mortgage payment, but there’s more to it than that. Here’s why.
The primary direct costs of owning a home include:
- Mortgage Interest
- Maintenance and repairs
- HOA fees
Utilities aren’t included because if you sell your home you’ll move somewhere, and unless you’re moving back in with your parents you’ll be paying for utilities. And for investors utilities are normally paid by the tenants.
If you’re a homeowner your mortgage payment may include principle and interest only, or it may also include a reserve for taxes and insurance (commonly abbreviated as PITI). But your cost of ownership only includes the last three items because the principle portion of the payment isn’t really an expense. Principle payments reduce your loan balance and increase your equity. Like making monthly deposits in a savings account.
Calculating the interest portion of your monthly payment is a bit complicated, but you may be able to get the answer from your mortgage statement. And if you’re good with Excel you can use the IPMT function to calculate it.
Maintenance and repair costs are important but more difficult to calculate. For a home that’s in good shape a reasonable assumption is that annual expenses will be 1% of the current market value.
So what’s the bottom line? Here’s an example based on averages for a recently purchased home in the Austin area. Want to see what your monthly cost of ownership is? Just enter the values for your current or planned home into the green cells of the spreadsheet.
Of course there are other financial considerations related to home ownership. Unlike renting, your mortgage payment is fixed and the interest portion declines over time. Rents and home values will move in tandem with changes in property values. Increasing property values result in higher rents, higher home prices, and higher property taxes for homeowners.
Speaking of taxes, income tax related considerations further complicate things. For instance, mortgage interest is income tax deductible and capital gains of less than $250,000 per individual or $500,000 per couple are excluded.
Finally, if you’re comparing home ownership to renting, or thinking about investing, you should consider the effects of inflation. With inflation renters will see a corresponding rise in rents while the interest portion of a homeowner’s costs are actually declining.
In spite of the uncertainty, having a rough idea of your cost of ownership is an important component of your overall financial plan.
Have questions about buying, selling or investing in real estate? Give us a call and we’ll be happy to help.