When considering buying a home, it’s crucial to recognize the long-term financial cost. The average household could cost over $1.5 million over a 30-year period. These are the sunk costs, meaning they are non-recoverable. To establish a realistic budget, it is essential to factor in these expenses before committing to a purchase. The following are some of the sunk costs to consider:

Interests Expense
Depending on your mortgage rate, interest costs can be one of your largest expenses. Your mortgage payment primarily goes toward interest in the beginning. For example, if you have a 7% mortgage, more than 80% of your payments for the first decade will go towards interest, not your principal. This is why it takes so long to build equity in your home.

Property Taxes
The average annual property tax rate is approximately 1% of the value of the home. This figure can vary widely depending on the city or county. For instance, in Cook County, the property tax rate is around 2.1%, which means that a homeowner with a $500,000 property will pay an annual property tax bill of roughly $10,500.

Home Maintenance
Owning a home involves managing all aspects of a property, such as lawn care, repairs, and maintenance. To plan for potential expenses, it’s recommended to set aside 1-4% of the home’s value annually for maintenance. For instance, if you need a new roof in a particular year, you may spend around $50,000. However, in subsequent years, your expenses might be significantly lower. This estimate is an average to plan for maintenance costs, some years may be less or more.

Homeowners Insurance
If you have a loan on the home you are required to have an insurance policy. The cost of insurance is determined by several factors, including the coverage type, home value, and more.

Cost of Selling
Real estate commissions are usually the biggest fees when selling. On average, the seller pays 5-6% of the sale price on commission fees, also known as realtor fees. For a $500,000 home, you’d pay around $25,000 in fees.

Cost of Buying
When buying a home your closing costs include all the expenses for getting a loan and finalizing the sale. The average closing cost in Illinois is 2.1% of the purchase price. Also, don’t forget the cost of filling your house. A house with more rooms has more spaces that “need” furniture.

Why Should You Buy a Home?
Building equity in an appreciating asset is the primary reason. Home prices have experienced an average annual growth of 4.75% over the past 30 years. But it’s important to keep in mind that there are periods of times we’re home prices go down or stay stagnant.

The decision between buying and renting depends on your individual circumstance. In general, buying is better if you plan to live there long term. If you plan to live there for 10 years or less, renting may be a better option.

Bottom Line
The costs of buying and owning a home can certainly add up. This is why it’s important to run the numbers based on your situation to see what works best for you. Buying a home is most likely your largest purchase and it’s crucial to get it right. If you need help building your budget, please don’t hesitate to reach out.

George Maroudas, CFP®

George Maroudas, CFP®

847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor

Disclaimer and Sources:

Information and interactive calculators are made available to you as self-help tools for your independent use and are not intended to provide investment, tax, or legal advice. We cannot and do not guarantee their applicability or accuracy in regards to your individual circumstances. All examples are hypothetical and are for illustrative purposes. We encourage you to seek personalized advice from qualified professionals regarding all personal finance issues.

This material was created to provide accurate and reliable information on the subject covered but should not be regarded as a complete analysis of this subject. The opinion voiced is not intended to provide specific legal, tax or other professional advice. The services of an appropriate professional should be sought regarding your individual situation.

1. How does a average home cost $1.5 million dollars over 30 years:

$10K of closing cost for buying a home.
$553K from interest on 30 year mortgage at 7% with 20% down
$555K for property taxes. 2.1% of home value annually (Cook County Rate)
$255K for repairs/maintenance. 1% of home value annually.
$102K for home insurance. 0.40% of home value annually.
$83K cost of selling. Based on home appreciation of 3% and a 6% realtor fees. 

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$1.56 million total cost

2. Average home cost of $495,100 in the United States from Forbes
3. Home growth rate of 4.75% from Case-Shiller Home Price: National. Data from YCharts. Used a more conservative growth estimate of 3.5% for the total cost calculation.
4. 80% of the mortgage goes to interest in the first decade from George Maroudas.
5. Cook County property taxes 2.19% from SmartAsset
6. Home maintenance costs 1%-4% of your home’s value from StateFarm.
7. Cost of selling a home between 5 and 6 percent of the home value from BankRate.
8. Closing costs of 2% to 5% of the purchase price from the National Association of Realtors.
9. Average closing cost in Illinois 2.1% from BankRate.