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Monthly Housing Expenses: The True Cost of Home Ownership

Written by:  

Mike Tassone

Mike Tassone

Mike Tassone

Mike is a Co-Founder and Chief Operating Officer of Own Up. He has expertise in all areas of residential lending, having led operations for a top 40 lender in the United States.

Updated: Jul 12, 2023

Swanky modern house

Are you trying to estimate your monthly housing expenses? Let's dive in!

Mortgage interest rates have been steadily falling since the beginning of 2018. Now closing in on the previous low record for this century, 3.31% for an average 30-year fixed mortgage in 2012. This makes it very tempting for renters looking to swap a rent check for a mortgage payment and the growing home equity that comes with it.

If only it were that simple.

Yes, mortgage interest rates are nearing historic lows. Still, housing requires some additional math. Home prices are rising, partially pushed by a shortage of inventory. And owning a home is a much more complicated equation than a mortgage. Utilities, maintenance, and insurance must all be taken into account, along with many household expenses. How much does it cost to own a home? Is now the right time for you to become a homeowner?

Read on to find out—but make sure your pencil is sharpened because there will be some equations.

Step 1: Housing Expenses & Your Debt-to-Income Ratio

Renting is simple math. Landlords usually consider little more than your monthly income and employment longevity. Renters' most significant expenses are rent, insurance, and utilities. Homeowners have housing expenses that are much higher and include items that should be considered.

If you stop paying rent, landlords can evict you and bring in a new tenant. Lenders have many more questions as they back your mortgage, and they want to make sure you make your payment every month.

One way lenders gauge your financial situation is through a debt-to-income ratio (DTI) calculation. This formula helps lenders determine if they have the capacity to meet monthly debt obligations. To get a qualified mortgage, your DTI generally needs to be below 43 percent.. A lender who provides a qualified mortgage makes a good-faith effort to ensure the borrower can repay the loan before approving it. You can get a mortgage with a DTI above 43%, but it depends on other factors in your loan profile.

To assess your debt, lenders request a credit report, including your credit score and your monthly debt obligations. These include credit card payments, school loan payments, and car payments. Note that installment payment of less than 10 months is not included in this calculation unless they affect the borrower's ability to pay.

To assess your income, lenders look at your gross income from work, social security income, savings, retirement balances. Money contributed by family members might also be taken to consideration.

Debt-to-income ratio (DTI)= Total monthly debt/gross monthly income

See What You Qualify For

Step 2: How much house can you afford?

Lenders need to make sure borrowers spend no more than 28 percent of gross monthly income on mortgages and associated housing costs. Sometimes, the front-end ratio does not include other housing expenses like utility bills or cable TV services. It does include:

  • Principal and Interest (P&I): These are the main components of your monthly mortgage payment. A principal is the amount borrowed that has to be paid back to the lender. Interest is what the lender charges for lending the borrower money.
  • Property Taxes: The tax is based on the value of the subject property and is assessed by the local municipality. It is prorated and charged as part of the monthly mortgage payment.
  • Homeowner's Insurance. Insurance for owner-occupied properties to protect against personal liability and physical property damages. It is usually prorated and charged as part of the monthly mortgage payment.
  • Mortgage Insurance. Borrowers who put less than a 20 percent down payment must pay additional insurance, called private mortgage insurance (or PMI). Borrowers with FHA loans must pay a mortgage insurance premium (or MIP).
  • Flood Insurance: Compensates for physical property damages resulting from flooding. It is required in federally designated Special Flood Hazard Areas. The lender will conduct a flood certification to determine whether the property is in a designated flood zone.
  • Homeowners' Association (HOA) Dues. HOA is an entity that supports the day-to-day operation and interests of residential dwelling communities. Including condos and co-ops. HOA dues are paid monthly.

Everyone's situation is unique, but U.S. Census data offers a yardstick. The majority of households who have a mortgage (60.1 percent) have a household income over $75,000, according to the 2017 American Community Survey. Of that total population:

  • 68 percent spent less than 20 percent of their income on housing costs
  • 25.4 percent spent between 20 and 30 percent of their income on housing costs
  • 6.6 percent spent over 30 percent of their income on housing costs

When calculating your housing costs, be prepared to find private mortgage insurance, homeowners' insurance, and real estate taxes.

Affordability= Housing costs/Gross monthly income

Step 3: Household Expenses

Let's face it, life is expensive, and owning a house adds to that expense. How expensive? Well, we've already discussed housing expenses. You need to factor in living expenses, as your mortgage is one of many bills you pay each month.

Being able to afford your monthly mortgage payment is essential. But more important is being able to pay that monthly bill along with all your other bills. These bills can be grouped broadly into two categories: other housing expenses and living expenses.

Other housing expenses beyond those used to calculate housing affordability:

  • Maintenance and repairs: There is a landlord to fix a leaky toilet or hire someone to check over the heating system. A good rule of thumb is to put aside 1 percent of your home's value each year for maintenance and repairs, more if you can afford it. You can use Homebinder to digitally manage your maintenance schedule and keep track of receipts.
  • Emergency fund: Let's face it, emergencies happen. The roof leaks, the water pump dies, someone is laid off. This fund is for big-ticket items that will happen at some time. Knowing the age of your appliances and major systems and keeping up with maintenance make these repairs more manageable. It is suggested that people have three to six months of living expenses in this fund to cover housing, food, transportation, health care, utilities, personal expenses, and any debt payments.
  • Savings Fund: This fund, unlike the other funds, are not geared to a specific purpose, but when you want a new kitchen or need a new car, you will be happy it is there.

Household expenses

People tend to forget about interest and real estate taxes. But they do add up, so knowing what they cost is critical. So you don't put yourself in a position where you are house poor. Meaning you spend a large percentage of your income on house ownership without money left over for other costs.

According to the latest data from the Bureau of Labor Statistics, household expenditures are rising. Between 2017 and 2018, household expenses for food, transportation, housing, personal insurance, and healthcare all increased. And this increase followed increases in household expenditures between 2016 and 2017.

These monthly expenses include:

  • Food, home upkeep, and personal care items (even small items like haircuts)
  • Health insurance and health care costs
  • Utility bills
  • Dining and entertainment
  • Transportation expenses (public transportation fares and car insurance and maintenance)
  • Childcare or daycare
  • Life insurance premiums

There are many different apps to plan for household expenses and get a picture of your finances. U.S. News and World Report reviewed its 10 favorites. As a bonus, they are all free.

Step 4: What Housing Choice is Right for You?

The housing choice that is right for you is a combination of your financial picture and your comfort level in terms of savings. It is often helpful to meet with a personal advisor to better picture your situation and make the wisest financial decision.

Some people choose to wait a little longer to buy and save more money for a larger down payment and lower interest rate, while others prefer to buy sooner. To get a baseline measurement of your situation, consider this rent vs. buy calculator from Fidelity. Beyond this, consider these three factors, which are harder to quantify.

  • Your lifestyle and life stage: People with jobs that are likely to change more frequently or desire to move often find homeownership more difficult as home ties you down.
  • Your tinker index: Homeownership is for you if you like being the handyman and having the freedom to remodel as you choose. If the handyman is a foreign word to you, but you want to own a home, be prepared to spend more money.
  • Your risk tolerance: Renting comes with risks and uncertainties from year to year. Homeownership does too, but they can be mitigated by planning and saving for surprise repair bills. Which situation suits you better?

Own Up is focused on helping people through the homeownership journey and empowering them to make the best personal decision through education about homeownership. Consider us your co-pilot. Because we streamline the origination process, lenders save money to pass the savings on to you. The Consumer Financial Protection Bureau estimates that rates can vary among lenders by as much as 0.5%, which can equal tens of thousands of dollars over the life of a mortgage. Why pay more than you have to?

If you are considering buying a home, call us. Our advisors are waiting and ready to help you estimate your housing expenses.


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