What You Need To Know Before You Buy: The True Cost of Homeownership

In 1776, Thomas Jefferson wrote the words “Life, Liberty, and the Pursuit of Happiness” in a letter to the King of England, which livedI on in history through the Declaration of Independence. But did you know that these words were not original to Jefferson? Almost a century before, the famous philosopher, John Locke, penned the original phrase “life, liberty, and the pursuit of property” in his publication, The Treatises of Government. 

This idea that citizens of a nation have the right to property, and thus, happiness has become foundational in the American psyche and many have come to the United States to live out this “American Dream”; however, owning a home can easily become a nightmare if you are not financially prepared for it. 

A lot of folks are lured into the notion of purchasing a home because the principal payment can sometimes be cheaper than the cost of rent. After accounting for the 4 main components of a mortgage payment: Principal, Interest, Taxes, and Insurance (or PITI for short), a mortgage payment can easily become MORE than the cost of rent. Also consider the saying common in the finance & real estate world: “Rent is the MOST you will pay per month while owning is the LEAST you will pay per month.”. You can see why it’s important to make sure you are in a good spot financially before making the largest purchase of your life!

Let’s run through some numbers as an example of the REAL cost of buying & owning a home, shall we?

  • Let’s say you are a young couple making $100,000 combined and have roughly $22,000 in debt (based on national averages). 

  • You have $15,000 saved for a down payment. This will end up being about 10% of our purchase budget but depending on your loan type, you may be able to do as little as 3.5-5%)

  • Did you know that the buyer is responsible for roughly 3-6% of closing costs? That means in addition to your $15,000 down payment, you will also need an extra $4,500-$9,000 just for the right to own the home.

  • Assuming a 7% interest rate, your purchase budget would put you in the neighborhood of $150,000 (this may vary based on a number of factors but we will use it for illustration purposes)

  • This would bring your principal payment to just under $900 a month – not bad right?!

  • We also need to add in taxes (assuming the national average of $2,690) which tacks on another $224 a month

  • Lest we forget insurance! In this example there’s actually two types of insurance:

    • Homeowners Insurance – we will figure about $1,000 (based on this report, we will keep a realistic estimate)

    • PMI (Private Mortgage Insurance): this is a specific type of insurance that is added to your mortgage payment by the bank (in the event of foreclosure) if you put less than 20% down as a down payment. This can be removed down the road if you refinance or once your home builds up 20% equity. If you were to use an FHA loan, you would have MIP or Mortgage Insurance Premium which is similar but cannot be removed unless refinanced to another loan type.

  • Once everything is all said and done, your monthly payment would be roughly $1300 a month*


Now $1,300 a month doesn’t sound too bad, does it? But let’s not forget that you also have the responsibilities of your other debts to take care of! This also assumes that a $150,000 home is suitable in your area – the national average is $412,000 which is a far cry from $150,000! And if your home will need ongoing maintenance, you may need to budget a MINIMUM of $2,000-$8,000 just for maintenance. And if your property resides in a community with an HOA fee, that could be another $50-$150 a month in addition to your mortgage payment. You can see how the cost of home ownership begins to add up quickly!

Now I know this sounds quite hopeless but the good news is it doesn’t need to! It is important to remember that like any large life decision, owning property is all about proper planning! Here are some things you can do to prepare for owning a home (other than just stop buying lattes):

  1. Pay down your debts! 

    1. Getting your debts (especially high interest ones) paid down will allow you to save more and therefore qualify for a larger purchase budget. When more of your income is going towards APPRECIATING assets (or things going UP in value), that is a recipe for success.

  2. Shop your interest rates!

    1. Not all banks and interest rates are built the same. See what different options you have in regards to your interest rate by shopping different banks (or use a mortgage broker to do the shopping for you!). Even small differences in interest rates can save you thousands of dollars over time.

  3. Be patient!

    1. The worst thing you can do when buying a home is buying one BEFORE you are ready to do so financially. Do not let the pressures of the American Dream force you to make a bad decision – keep working on your financial health and remember that all good things come to those who wait. Do not let your home become a burden and not the blessing it should be!

  4. Work with a professional!

    1. Make sure to choose a realtor who can help answer all your questions and not someone who wants to push you into a home that is not right for you. 


In addition to a good realtor, it is important to work with someone who can help you make the best decisions along your financial journey. Here at Simmons Capital, we want to help make your current (and long term) dreams a reality and we can help you by looking at your current financial health and determining what steps you need in order to get to where you want to be. Because like John Locke and Thomas Jefferson, we want to help you experience life, liberty, and the pursuit of property & happiness!


Audra Higgins