Butch on a Budget

I have several friends who are looking to buy houses right now. Why? Well, a major reason is they feel like they are throwing away money each month on rent. 

I get that — rent everywhere has ballooned over the past few years. 

However, I also think that the idea that renting is ~always~ throwing money away, or that buying is always cheaper than renting, is worth examining a bit further. For most people, buying a house is the biggest financial decision they’ll make in their lifetime – so it’s worth taking the time to really run the numbers and make sure it makes sense for your wallet — and your life. 

Having these conversations over the past couple of weeks got me wondering about what owning our home has cost me and Cassie over the past three-ish years, and I thought it might be fun to run a little post-mortgage analysis with you.

So, I’m running our real numbers to figure out how much our house has cost us over the past 38 months – and how that compares to what we would have paid in rent. 

What Costs Make Up a Mortgage

When I say “how much our home has cost us”, I don’t just mean how much we’ve paid in mortgage payments over that time – there are lots of other costs to owning a home on top of your mortgage. But I do want to take a moment to discuss the costs that make up a mortgage payment.  

Mortgage payments typically include three chunks of money: Principal (aka the initial amount your borrow), interest accrued on that amount, and escrow funds that go to pay for insurance and taxes. 

In my calculations, I’m not including the principal portion of our mortgage payments in our costs. The principal portion pays off the loan itself, and therefore will be accounted for when we calculate the equity we’ve built in the home at the end. Interest and escrow funds will be counted, because they aren’t building us any equity. 

To give you an idea of how much we’ve paid toward the principal, our original loan amount was $265,000 and our current loan balance is $235,078. That means that over the past 38 months, we’ve paid $29,922 towards the principal — or an average of $787 per month.

The actual portion of your mortgage that goes towards the principal changes as you pay off the loan. At the beginning, the bulk of your payments go to interest charges. Over timee, however, that balance shifts and the portion going towards interest lessens.

Okay, so now to the nitty gritty!

The Real Cost of Owning Our Home

I’ll express the costs first in total numbers, but for some of the costs, I’ll also divide by the 38 months to get an average monthly cost. That will help us get a closer comparison to monthly rental rates. 

Inspections & Closing Costs: $7,338 (one-time cost)

The process of buying a house comes with additional costs beyond the down payment. For us, these costs included the appraisal, various inspections, prepaid escrow funds, a loan origination fee, and transfer taxes. All of which totaled $7,338. 

Now, it’s important to note that since this is a one-time cost, the longer you stay in your house, the longer this cost has to average out to negligible monthly amount. For us right now, it works out to abouot $193 per month — but it’s a lump sum that we paid all at once. 

Interest: $21,134 (average of $556 per month)

We were super lucky in the timing of our home purchase. We closed on April 1st, 2020 and locked in a 2.75% interest rate. This was a full percentage point lower than a friend of ours who had bought a house just a few months before us, and nearly one-third of what average interest rates are for a 30-year mortgage (July 2023, for those of you reading this in the future).

Taxes & Insurance: $26,057 (averagee of $685 per month)

That’s right — when you own a home you are responsible for paying property taxes and homeowners insurance. Living in a rapidly growing city in hurricane-prone Florida has meant that each of these items have increased more than $200 per month since we first bought our home.

Ultimately, that means our monthly mortgage has increased about 25% since our first payment. 

There’s a myth that your mortgage stays the same forever — but in reality, it is subject to changing property taxes and insurance costs if these things are bundled into escrow payments on your monthly mortgage. No matter where you live, these costs will likely be increasing over the next few years thanks to climate change. 

Required Repairs & Maintenance: $25,634 (average of $674 per month)

Whew. Owning a home can sometimes feel like you’re spending your hard-earned money on fun things…like water heaters and fixing leaky pipes.

Over the past 38 months, we’ve spent $25,634 on required repairs and upkeep. This includes…

• replacing broken appliances
• replacing two ACs (we have a duplex, remember)
• installing a new water heater
• a leak detection service
• a roof patch
• replacing a weather head
• a visit from an electrician
• two visits from a plumber
• fence repair
• tree trimming
• pest control
• and regular minor maintenance and repairs like light bulbs, filters, etc. 

Now, obviously buying a single family home is a bit different — you’re not going to have to replace two air conditioners in two years. But we’ll be taking into account the rental income we make further down. 

The age of your home also makes a difference.

For the first 5 years after a home is built, it’s recommended that you save about 1% of the purchase price each year to put towards repairs and maintenance. If your house is more than 5 years old, you should be slowly increasing that percent. By the time a house is 25 years old, you ought to be saving 4% a year. Our spending here has been in line with that general guidance.

Total Required Costs: $80,163 (averaging $2,109 per month)

Between closing costs, interest, taxes, insurance, and repairs and maintenance, we’ve spent over $80,000 in a little over three years. Keep in mind that this doesn’t include any payments to the principal of the loan (which would be included in our monthly outflows from our bank account). I’m not including that here because it will even out when we discuss equity a bit later on, but it is a cost.

Importantly this also isn’t including money we’ve spent to make optional updates to the house since we bought it. And let’s be real, if you buy a house there’s going to be at least a few things you want to do to make it feel more like your home. So let’s take a look at those numbers.

Optional Updates: $25,636 (average of $674 per month)

For us, this includes painting, installing new floors and baseboards, replacing some light and bathroom fixtures, installing impact windows ($14,000 alone), new blinds, and other various smaller projects.

Other than installing the windows, we made all of the updates ourselves. So there are minimal labor costs in there (but it does includes tools and supplies we purchased to complete these projects). 

What this amount does not include is the money we’ve spent building out our garden or new furniture we purchased for the house.

Total Including Optional Updates:
$105,799 (an average of $2,784 per month)

If we include the optional costs, we spent a total of $105,799 on our home — again, not including payments towards our principal – over the past three-ish years. As far as cash-flow goes, that’s $34,099 (or $897 per month) more than we would have spent on rent over the same time period. 

How does this compare to what we would have spent on rent?

When we bought the house in April 2020, we were living in a rental and paying $1,500 per month in rent (which didn’t include water, electricity, or internet — none of which we’re including in our cost of homeownership, either).

If we had continued living in that rental, we would have spent $13,500 on rent from April to the end of the year.

But as we all know, rents increased quite a bit in 2021, so I’ll (conservatively) put our rent at $1,800 per month for a total of $21,600 for the year 2021.

For 2022, we’ll go for an even $2,000 per month and $2,100 for the first six months of 2023 – all together, this equals a hypothetical grand total of $71,700 spent on rent for the equivalent time we’ve been in our house. 

These numbers are based on market value rent for the type, size, and location of the place we would have been looking to rent. 

Estimated rent: $71,700 (average of $1,886 per month)

Required costs of our home: $80,163 (average of $2,109 per month)

Total spent on our home:  $105,799 (average of $2,784 per month)

According to these numbers – not even including the $787 per month we’ve been paying towards the principal of our home loan – our monthly costs we’re $898 higher living in our home, compared to renting.

Now, if we lived in a single-family house we’d stop the calculations here and jump into discussing equity. But we don’t. We bought a duplex specifically so we could offset some of the costs of owning our home through rental income. So let’s take a look to see how that changes our numbers.

Rental Income: $48,600 (average of $1,278 per month)

Since we bought our house, we’ve made $48,600 in rental income. Now, you may be wondering why that’s so much lower than what we ourselves predicted we’d pay in rent.

We’ve consistently charged between $700-$1000 per month below market rate since we’ve rented it out – meaning this number could be closer to $72,000 if we had chosen to rent it at its market rate.

However, we believe more in the importance of affordable housing, and the positive benefits of living in a financially healthy community, than adding more dollars to our own balance sheet. So, we chose to rent it for what we thought was a fair, not market, price. Single moms deserve decent places to live.

So…was owning our house more or less expensive than renting?

When we factor in the costs of owning our home (-$105,799), add in the rental income we earned ($48,600), and compare that with the money we would have spent on rent otherwise ($71,700), we come out on top by $14,501 after 38 months.

That means our costs worked out to be $381 less each month on average by living in one half of our duplex and renting out the other. 

But what about equity????

I know, I know! Home equity is a big deal, and is a huge reason in the “pro” column for buying a house. I’m SO grateful for the equity we’ve been lucky enough to build in our home because it will certainly create a lot of opportunities for us in the future. 

So let’s break it down. 

Equity = Current Home Value – Remaining Loan Balance 

Current Home Value: $440,000

Based on the average of a few current online estimates, our home value is around $490,000 – but you have to remember that when you sell your house, you typically pay 6% of the sale price in realtor fees, plus there are other closing costs associated with the sale.

So to calculate the amount of money we would actually walk away with from the sale, I’ll use 90% of the estimated sales price. 

Remaining Loan Balance: $235,078

Our original loan amount was $265,000.

But remember all that principal we paid that I didn’t calculate earlier? This is the remaining balance on our loan after paying twice-monthly mortgage payments for the past 38 months. That balance goes down slowwwwly in the first few years because of interest. 

Our Total Equity:

$440,000 – $235,078 = $204,922

Add in the $48,600 earned in rental income and subtract our total costs and we end up with $147,723. That’s not too shabby compared to the alternative of paying $71,700 in rent.

And if conditions were the same as they were in 2020 when we bought our house, I would definitely encourage my friends to buy. 

*Record Scratch*

But they’re not. 

How does this compare to buying a house today?

To be clear, we bought our house at an unusually good time. We locked in a low interest rate almost a third of what today’s average is. And we were lucky enough to buy our house and have it nearly double in value in a few years. That is NOT normal, and honestly, it shouldn’t be. 

As for the interest rate, when you buy a house you are typically borrowing a lot of money, so even a 1% difference on your mortgage rate can mean a huge difference in interest paid over the life of the loan. 

For example — if we would have bought our house at today’s average 30-year mortgage rate (7.45%), we would have paid an extra $750 per month in interest, on average, over the life of the loan. Interest doesn’t build equity — it’s “throwing money away” just like rent. 

To put it into perspective, with our 2.75% interest rate, we will pay $124,462 in interest over the life of our loan. If we had bought our house for the exact same amount but with today’s 7.45% interest rate, we would be paying $398,787 in interest over the life of our loan.

That’s over $100,000 more than the purchase price of our home, and $270,000 more just in interest costs compared to our actual rate.

As for home values increasing, in most cases, your home is not going to almost double in price in three years. Not even close. 

Over the past 30 years, home prices have increased by 4.6% per year on average. We happened to buy just before the highest year-over-year increase in over 30 years and in a highly-desirable growing area. But that type of rapid value increase is not likely to repeat again in the next couple of years; it’s just not sustainable.

So, let’s play out a hypothetical scenario where we buy our same house today, but for the current valuation of $490,000.

In this scenario, we’ll put down a 10% down payment ($49,000). We’ll pay today’s average interest rate of 7.45%, and current tax and insurance rates. With these terms, our monthly mortgage would be $4,321 a month. 

As for other costs, I’ll keep the required repairs and maintenance costs the same as well as closing costs, but will cut our optional updates by 75%. I’m doing this because if we were to buy our house today at current interest rates, our monthly mortgage would be so much higher that we simply wouldn’t be able to afford most of the updates we made.

For this scenario, we’ll only increase the home’s value by an average of 4.6% each year, but we will be charging our hypothetical tenants market rate for rent – $2,200 per month to help cover that higher mortgage. 

Let’s see how the numbers shake out over the next three years.

Hypothetical Scenario Costs

Thing	Monthly Cost (Averaged over 3 years)	Total
Closing Costs	$203	$7,338
Interest	$2,600	$93,600
Taxes & Insurance	$938	$33,775
Maintenance & Repairs	$712	$2,5634
Optional Updates	$178	$6,409
Total Costs	$4,632	$166,756
Principal	$781	$28,116
Total Including Principal	$5,413	$194,872

While we’re not counting the principal as a true “cost”, for understanding cash flow, it’s important to see what your average monthly outflows would be including those principal payments.

Hypothetical Scenarios Income & Equity

Estimated Home Value: $494,400

Remember, this is after applying 4.6% in annual value increases for three years, and subtracting anticipated closing costs if you were to sell.

Remaining Loan Balance: $403,859

This would be your remaining loan balance after putting 10% down and paying your mortgage for 3 years.

Rental Income: $79,200 ($2,200 a month)

$2,200 a month is pretty average for a 3-bedroom home in our location.

Total Equity + Rental Income:

($494,400 – $403,859) + $79,200 =

$169,741

Hypothetical Scenario Final Numbers

So, if we subtract our total costs ($166,756) from our equity and rental income we get a grand total of $2,985 of wealth built over 3 years.

While still in the positive – especially compared to paying $75,600 ($2,100 per month) in rent over the same time – it’s quite a bit less than the nearly $150,000 of wealth earned compared to our actual purchase scenario (even while charging $30,000 less in rent).

That’s because interest rates are so much higher now, and house values are growing at a much slower and more typical rate.

What does it all mean?!?

Does this mean you shouldn’t buy a house right now? Not necessarily.

Even with all of the added interest costs and repairs, we still came out in the positive after 3 years in our hypothetical scenario. In this case, that was only possible because of the rental income provided by our house being a duplex. 

A house being a “good investment” depends on a number of factors. One huge factor is how long you plan on living in the house. You’ll also consider…

• How much money you can put down
• What your monthly cash flow is
• If the property has rental income potential
• And factors specific to each property – needed repairs, expected location growth, impact on commute, etc. 

If you are planning to stay for at least five years (but ideally longer) those one-time costs of buying a home have more time to dissipate over the long run, and you will hopefully have a chance to refinance to a lower rate a few years into your mortgage.

Interest rates are high right now, so the more money you can put down upfront, the less you’ll be paying in interest initially. 

If you want to buy because you think it will lower your monthly rent, I would encourage you to think again.

If we rented during the same hypothetical timeline above, we would expect to pay about $2,100 per month in rent. Right now, the principal and interest payments alone would likely be higher than that. Throw in the unexpected repairs, taxes, and insurance, and you’re at risk of seriously messing up your monthly cash flow and ending up in a financially tough spot.

While your rent may go up a bit year to year, you don’t have to worry about getting hit with a surprise $6,000 repair bill, and you have a lot more flexibility. I also think most places are not at a huge risk of seeing massive hikes in rent like we’ve seen over the past two years. Rental prices are starting to stabilize – albeit at high prices – and in some cases, prices are starting to come down.

Unless you are specifically looking for an income-producing property, I wouldn’t think of buying a home as a financial investment. In most cases, you’ll likely pay more in interest and maintenance than the home’s increase in value.

Think about it — if your interest rate is 7.45% and a home’s value only increases an average of 4.6% a year, that math just doesn’t add up unless you’re putting a lot down and/or living there for years.

If you’re looking for an investment and to build wealth, you’re likely better off maxing out your retirement accounts and putting your money in VTSAX every month instead of buying a water heater and patching a roof.

If buying a house means finding a home to build a stable life in for years to come, then it might make sense for you. 

Bottom line: I can’t tell you what’s right for you. There are way too many complicated factors in the mix, and emotions play a huge role as well. But I would encourage you to dig deep into the numbers (beyond the sticker price). I’d also enourage you to do some soul-searching — does buying a house feel like what you should be doing because you’ve hit a certain age or because your peers keep posting photos of their new home?

Don’t let social pressure and FOMO put you into a tough financial position. Be honest with yourself and the numbers, and do what makes sense for your life today and what you want out of your future.