Analyzing our Mortgage Related Expenses

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My wife and I have been spending a lot of time lately focusing on cutting our expenses. One of our biggest financial goals is to invest more money into assets that produce income – most notably dividend stocks.

While we are focusing on bringing in more side income to invest, we also need to focus on the other side of the net worth equation – our expenses.

In order to have more funds to invest, our family needs to focus on living well below our means. That means cutting back wherever we can (within reason) without totally sacrificing our way of life.

Over the next several weeks, we are going to be putting together a monthly budget that will help us cut our spending.

Home Ownership

The first expense that we wanted to tackle is the cost of home ownership. Now I am not talking about all the extras that keeps your home functioning like maintenance expenses or utilities. Instead, we are focusing on our mortgage, insurance, and taxes for the home.

Note – Owning a home can be expensive. However, with a large size family we are not willing to cut back for a smaller home or even renting a place. Having a mortgage, paying property taxes, etc. are expenses that we are currently willing to live with.

Mortgage, Insurance, and Taxes on Our Home

Let’s take a quick look at our mortgage related expenses. For the most part, these expenses will be fixed for the next year at least.

The list below shows how much we paid last year on our mortgage, home owner’s insurance, and property taxes. Based on these numbers, we can begin setting up our budget.

  • Mortgage Payments for 1 Year – $12,938.52 (or $1,078.21 / month)
  • Home Owners Insurance – $1,071.00
  • Property Taxes – $4,000.50

We have a 30 year fixed rate mortgage and pay $1,078.21 per month. The past couple of months we have looked into refinancing (for a second time) but it is not worth it at this point. So for now there is not a lot we can do to reduce this monthly expense.

Unfortunately, the cost of owning a home doesn’t just stop at a mortgage. Home owners insurance ($1,071 last year) and property taxes ($4,000.50) also need to be paid.

Shockingly, last year our property taxes actually decreased and we don’t expect them to go up much next year. We also don’t expect any increase in our home owners insurance either – so for now these expenses seem to be fairly static.

Note – Years ago we had an escrow account setup with our mortgage lender to collect money for our home owners insurance and taxes. I got tired of giving our lender a free loan on our money. So we decided to setup our own escrow where we earned the interest on our money instead.

Mortgage and Escrow Breakdown

We already know that as long as we stick with our current fixed rate mortgage, our monthly payment will remain $1,078.21.

Based on last years home owners insurance and property tax payments, we can also get a good estimate of what we need to save each month for our escrow account. These 2 expenses totaled $5,071.50 last year, which comes out to an average of $422.63 per month.

Adding our escrow and mortgage together, we need to plan on budgeting approximately $1,500 per month for our home.

$1,078.21 (Mortgage) + $422.63 (Escrow) = $1,500.84

Mortgage and Escrow Monthly Cost = $1,500.00

It is important to point out that prior to this month, we had been budgeting $400 for our escrow. I am glad we did a review of these costs so we can prepare for a short fall when these payments are due next year.

Final Thoughts

Over the next several weeks we are analyzing our spending from the first 6 months of the year (and from all of last year) in order to put together a monthly budget.

Analyzing our mortgage was one of the easiest places to start. Our monthly mortgage payment is fixed and will not change for many years to come.

We have also been putting away $400 in an escrow account each month, although that needs to be bumped up to prevent a shortfall.

Going forward we plan to automate our mortgage related expenses by budgeting $1,500 and transferring it to a special savings account each month. From there, our mortgage will be paid each month and the remaining balance will be used when the time comes to pay our taxes and insurance.

Do you keep track of your own escrow account or let your mortgage lender handle it? Any suggestions for lowering our mortgage related expenses?

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