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Actions How a $300,000 Mortgage Will Impact Your Monthly Expenses
Key Takeaways
- Home, expensive home (maybe $1,000 more a month than renting).
- Didn't include investing in your budget? D'oh!
- Save extra for the transition from new home to not-so-new.
You're ready to buy your first home. But every time you see that big number associated with a new mortgage, you swallow hard. It just seems overwhelming. But like any good plan, a mortgage is broken down into smaller steps — your monthly mortgage payment. Looking at that payment as it relates to your other monthly bills and income can help you understand how your budget will change and put the situation into a light that's a lot less scary.
A pre-homeowner scenario
So let's say you're the head of household for a family of four (two kids). Both you and your partner have jobs that, combined, yield take-home pay of $125,000 a year (about $10,417 a month). Your current monthly expenses1 might break down as follows:
| Monthly Bills | Cost |
|---|---|
| Rent | $1,300 |
| Electricity | $90 |
| Gas/Heat | $100 |
| Water/sewer/trash | $100 |
| Renter's insurance | $12 |
| Car 1 (total cost of ownership) | $493 |
| Car 2 lease payment | $294 |
| Car insurance and tags Car 2 | $93 |
| Gas for both vehicles | $250 |
| Groceries | $900 |
| Phone (2 lines) | $90 |
| Internet/Cable | $90 |
| Student loan repayment | $140 |
| Clothes | $100 |
| Child (K12) education | $75 |
| Medical allowance (for deductibles, etc.) | $60 |
| General taxes (assumption of liability) | $200 |
| Total monthly expenditures $4,387 ($52,644 per year) | |
Set extra money aside right from the start in anticipation of a snowball effect.
Buying your home
Now let's say you take on a $300,000, 30-year mortgage with an interest rate of 3.94%. Your monthly expenses1 now looks like this:
| Monthly Bills | Cost |
|---|---|
| Mortgage | $1,140.27 |
| Electricity | $120 |
| Gas/Heat | $150 |
| Water/sewer/trash | $100 |
| Homeowner's insurance | $87.50 |
| Car 1 (total cost of ownership) | $493 |
| Car 2 lease payment | $294 |
| Car insurance and tags Car 2 | $93 |
| Gas for both vehicles | $250 |
| Groceries | $900 |
| Phone (2 lines) | $90 |
| Internet/Cable | $90 |
| Student loan repayment | $140 |
| Clothes | $100 |
| Child (K12) education | $75 |
| Medical allowance (for deductibles, etc.) | $60 |
| General taxes (assumption of liability) | $200 |
| Property Tax (1.4% of home value annually) | $350 |
| Maintenance/repairs (2% of home value annually) | $500 |
| Total monthly expenditures $5,232.77 ($62,793.24 per year) | |
In sum, by taking on the mortgage, you've exchanged your rent for a mortgage payment, swapped renter's insurance for homeowner's insurance, upped your gas and electricity bills (it costs more to heat and power a house), and taken on both property tax and maintenance/repair costs. In exchange for the freedoms that come with owning your own place, you're paying an extra $845.77 per month, or $10,149.24 annually.
The variables, they are many
Of course, the above figures represent a relatively frugal, bare-bones or "essentials" budget. Other variable costs, such as entertainment, having a pet or buying a new couch all have to come out of whatever discretionary money is left, so realistically, cash outflow probably would be higher. And this scenario assumes you're not trying to invest, save or amortize the mortgage, as well. It assumes a 30-year mortgage because, even though you'll end up paying more over the life of the loan, the longer term length yields lower monthly mortgage payments, thereby giving you more flexibility in other budget areas. If you were to run the same scenario with a 15-year mortgage, your loan payments would be much higher at $1,770.44 per month. You'd pay $5,862.94 per month ($70,355.28 annually) for all your bills in that case, or $630.17 more per month than the 30-year mortgage, or $1,475.94 more per month compared to renting.
You also need to consider your lifestyle preferences. For example, you'll have costs that generally aren't counted in maintenance for the house itself, such as lawn care. Those types of expenses can vary considerably based on whether you do the job yourself or hire someone. And you might want to make changes to the home that can add to your budget, such as adding a porch, painting or doing some landscaping.
Additionally, think about how the home will perform over time. As you approach the end of your mortgage, repair and maintenance expenses likely will increase. For example, in the first few years of homeownership, most of what is in your home should be in great condition, assuming the home is new. You thus shouldn't have to put a ton of money into the property. But around the 10-year mark, appliances and other features of your home, such as your water heater, likely will start to need work or replacement. It can be wise to set extra money aside right from the start in anticipation of this snowball effect.
Lastly, remember that budgets often need some adjustment. For example, in the above scenario, you're assuming a family of four. But what if another mini-you comes along and makes five? Or maybe you find a way to economize down to just one vehicle. Will you really need to spend $900 in groceries once the kids are in college? And what about inflation? If you retire during the life of the mortgage, will your income from a pension or other sources be higher or lower than when you started?
What you can do next
Moving from renter to homeowner means budgeting for bigger costs — maybe $1,000 a month or more — for items like insurance, upkeep and utilities, along with expenses that can change over time (and some you just can't anticipate). With a mortgage, the loan term could be key to knowing what you can (and can't) handle comfortably; a longer term means lower payments and maybe more "wiggle room" in your budget. Before you make the move, factor in your income and as many expenses as you can — then do the math!
Footnotes
Wanda Thibodeaux is a freelance writer and sole proprietor of Takingdictation.com. Her work has appeared in online and print publications such as The Finance Base, Legal Beagle, Bankaroo and Inc.com.
Sources:
- ApartmentRatings.com (2017). Average Utility Costs Per Month: What's Normal?
- Bankrate, LLC. (2017). Mortgage Calculator
- Cable News Network (2016). Property Taxes: How Does Your County Compare?
- Henshaw, A. (n.d.). What Is the Average Cost for Homeowners Insurance?
- Koretzky, M. (2011). 6 Myths About Renter's Insurance--And How to Save
- Mercadante, K. (2015). How Much Does It Really Cost to Own Your Car? You'll Be Amazed.
- Minch, E. (2015). The Real Cost of Heating.
- Reed, P. (2015). Comparing Car Costs: Buy New, Buy Used or Lease?
- United States Department of Agriculture (2015). Official USDA Food Plans: Cost of Food at Home at 4 Levels, U.S. Average, February 2015.
- Vohwinkle, J. (2010). Poll: How Much Do You Spend on Gas Each Month?
- Weston, L. (2016). The Huge, Hidden Costs of Owning a Home
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