Monthly Home Ownership Expenses Compared to Renting—Can You Afford It?

Most renters have heard the adage “You’re throwing money away when you rent.” True, renters will never recoup the money they pay their property owner every month. On the other hand, homeowners contribute to a valuable long-term investment every time they make a mortgage payment. While owning a home has many benefits, the decision to rent or own requires careful consideration of what it will cost.    

Those considering home ownership need to be fully aware of expenses when owning a home. Monthly homeownership costs may appear to be less than renting, but that is not necessarily the case. A realistic look at the expenses of owning a home is the only way to know if it’s time to take the plunge.

One of the first things homebuyers need to know is, “How much can we afford?” Consulting with a lender will determine how much they can borrow. A buyer’s agent will help them explore home ownership costs in various neighborhoods and whether this is the right time for them to buy a house. 

Before moving forward with house hunting, buyers need to have saved the money for a downpayment and for closing costs. First-time homebuyers may be surprised at how much money it costs to buy a house. 

• A down payment of 3% to 20% of the home’s price (except for loan types that do not require down payments such as VA and FHA loans.)  
• Closing costs, which include charges for title searches, lender fees, taxes, and insurance.  

Real estate agents help homebuyers nail down a price range for their house hunting based on their down payment and expected closing costs.  

Mortgage payments are the largest monthly home ownership expense and depend heavily on current interest rates. In recent years, many homebuyers benefited from low interest rates making more homes within their reach. In contrast, higher interest rates mean many homebuyers need to choose a less expensive home to get an affordable monthly payment. 

Interest rates are not the same for all homebuyers. Lenders use a combination of market conditions, buyers’ financial profiles, and the amount of the down payment before making a loan offer to a homebuyer. 

Real estate agents recommend comparing loan offers from three mortgage companies. (Berkshire Hathaway HomeServices Select Properties works with Nations Lending and suggests them as one option.) Each lender will supply a Loan Estimate, a three-page form that must be delivered within three business days of a loan application being submitted. The estimate will include the principal and interest to be paid over the lifetime of the loan.  

To calculate monthly home ownership expenses, estimate the cost of utilities, maintenance, and repairs, and more. Start with the biggest expense:  

Different than bills from credit card companies or car companies, mortgage bills include:   

• Principal: The amount of money paid toward reducing the total loan balance. 
• Interest: Based on the interest rate locked in at the time of the loan’s origination. 
• Escrow payments: Many lenders collect additional money every month to put into an escrow account. The lender uses these funds to pay insurance and property tax bills for the homeowner. Homebuyers who make a down payment of 20% or more and have excellent credit can often waive an escrow account. Instead, they are responsible for paying for taxes and insurance on their own. 

The cost of owning a home includes many expenses renters do not have to worry about. Landlords take care of maintenance and repairs and rent might include power, garbage pickup, and other expenses:

• Utility costs are a significant expense for homeowners: the average homeowner spends about $350 a month on gas and electricity. Homebuyers moving into a larger home need to be ready for higher utility costs to heat and cool the additional space. And those buying an older home may need a cushion for utilities that run more than they expected, or for improvements like new windows, better insulation, or upgraded HVAC.  
• Homeowners' association (HOA) or condominium association fees. Members must pay a monthly fee, usually $200-$300 a month for the upkeep of common areas. The HOA also may assess fees for community improvements.   
• Maintenance and repairs. Many new homeowners are surprised by the cost of monthly maintenance and repairs that were once their landlord’s responsibility. The average homeowner spends around $3,000 a year on maintenance and minor repairs. The total varies based on the size of the home, when it was built, and its condition. Experts recommend setting aside 1-4% of the value of your home each year for maintenance and repairs.
• Lawn care. Homeowners will need to DIY or hire a service to take care of the property. Doing it yourself requires buying a mower, plus gas and lawn mower repairs. Budget for fertilizer, flowers, and tree trimming too.

New homeowners might be blindsided by all kinds of expenses that they didn’t realize they’d need to pay. Trash pickup, water, and sewer—anything a landlord might have handled is now up to them.   

From hail damage to bats in the attic, the list of unexpected expenses when owning a home could go on forever. Homeowners who do not have the reserves to cover unexpected expenses often incur more debt to deal with the crisis. The best course of action is to save money every month for emergency repairs or home improvements.  

Consider the following list of unexpected home ownership costs that our agents see in the St. Louis area:

• The roof leaks and the roofer says it needs to be replaced. The average price of a new roof is $5,000 to $10,000. 
• The basement is underwater. The homeowner needs to rent water removal equipment or pay a professional to clean up the mess. And then they’ll need to determine if it’s a one-time thing or if the foundation needs major repairs.
• The air conditioner goes out on one of the hottest days of the year. 

Homebuyers also run into unexpected expenses when they realize the carpet may need to be replaced, the walls painted, and appliances replaced with newer ones. And if the house is bigger than their apartment, there will be additional rooms to furnish. These are optional expenses when owning a home, but they are important to consider when making a budget. 

Without a realistic picture of the cost of homeownership, it’s easy for house hunters to bite off more than they can chew. Real estate agents help ease the stress of wondering if a house is affordable by helping homebuyers estimate both their expected and possible unexpected costs. They’ll also help clients with questions related to homeowners associations, escrow accounts, and more. 

To begin your search for a new home, contact a real estate agent with Berkshire Hathaway HomeServices Select Properties.

Cover photo by Sisoje at Canva.com