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Want to know what I consider my biggest financial mistake? Actually, it would be my wife and I’s combined financial mistake … which was buying a home that was too big for our family.
About a decade ago, we bought 3,360 square foot home with a 30 year fixed rate mortgage. At the time, we thought the newly built home was a great steal and in some ways it was.
At the time of our purchase, it was the start of the housing crisis. And homes were beginning to drop in price … so we paid less than what the new home was originally selling at.
Our mortgage rate was decent too at 4.375% … so overall we felt great about the house we were buying and the monthly mortgage payment.
The only problem was (as we have later realized) that our home is too big … even with 3 kids.
We easily could have bought a 2,500 square foot home and lived comfortably. Last year, I calculated that buying a 2,500 square foot home in our same neighborhood would have increased our net worth by over $400,000 in 30 years!
Honestly, I think a home between 2,100 and 2,300 square foot in a good location is our sweet spot. It only took us 10 years to figure that out.
The Cost of Home Ownership
We can afford to pay our mortgage every month. And our property taxes, insurance, maintenance, utilities, and every other expense that goes into owning a home.
But if we would have been a little bit smarter 10 years ago … we could have purchased a smaller home and saved a crazy amount of money.
All that savings could have really helped us push closer to hitting our financial independence number.
What’s done is done. We have learned a tough financial lesson that hopefully we can pass along to our kids.
Eventually we plan to downsize into a smaller home that should save us some cash.
In the meantime, we like to track our overall housing expenses annually … which is what we are doing today for 2018.
How Much Does Our Home Cost per Year?
Overall, our housing costs dropped slightly in 2018 compared to 2017.
We spent $490.55 less this past year than the prior year … or a (2.2%) decrease.
What was the reason for the slight decline?
We had an increase in the following categories – property taxes, utilities, insurance, and HOA Due’s. But we spent a lot less on general maintenance on the home … which made up the difference.
Our actual mortgage payments were almost the same … we paid $6 extra in 2017 … which was from a bit extra principal payment.
Here is a detailed list of housing related expenses we paid in 2017 & 2018 –
[table id=8 /]
2018 Total Housing Expenses = $22,148.62
Breakdown of Housing Costs
As you can tell by the numbers … owning a home is not cheap … especially a house that is too big for our needs.
Breaking down our housing expenses … our mortgage made up the biggest chunk of costs which isn’t surprising. We paid an extra $240.53 on our principal. For the past couple of years I have been rounding our mortgage payments up to the nearest $100, which is where these extra payments come from.
The next biggest expense was our property taxes. We had an increase of just over $150, which is basically out of our control. The only thing we could do would be to sell our home and buy something smaller … that would have lower property taxes.
Just like last year, we leveraged a new rewards credit card to pay our property taxes.
For the second year in a row, utilities came in third on our list of housing expenses. This was a bit of a disappointment as we spent almost an extra $400 in 2018.
Utilities include basic necessity’s to live in a functioning home – heat, electricity, and water/sewer. Our trash and recycle service is included as part of our taxes.
As I mentioned before, our maintenance dropped by a bunch. In 2017 we had some issues with our furnace which bumped up those costs.
Finally, we paid about $1,000 for our homeowners insurance and another $176 in HOA fee’s.
As far as homeowners insurance … we will likely be looking for another provider in 2019. Rates keep rising year to year on our home and when we went to file a legitimate claim in 2018 for roof damage … our current provider denied it.
Overall Housing Costs in 2018
Overall, we paid $22,148.62 to live in our home last year. That averages out to $1,845.28 per month.
2018 Monthly Average = $1,845.28
That monthly total comes out to 36.7% of our average take home income. We try and budget for $5,000 of spending (take home pay after taxes) each month.
Anything leftover is always invested.
So as you can tell, housing makes up a huge chunk of our monthly spending.
Rent vs. Buy
When it comes to discussing housing expenses in the financial independence community … the rent vs. buy debate often comes up.
For our family of 5, we need some form of shelter.
Living on a sailboat or traveling full time in an RV sounds like an awesome time … but we choose to live in a house (for now).
So we need to either rent or buy.
My wife and I value the stability of owning a place we can call home. So for us … we choose to buy instead of rent.
That doesn’t necessarily mean we haven’t consider renting. But for now, we want to own a home that is ours.
Interestingly enough … we have also realized that renting in our local area is actually more expensive than buying. So there is a financial savings in our location.
For example, a quick search on rental homes in our zip code tells me we can rent a similar home to ours for $1,950 per month.
The house is newer than ours and has some nicer furnishings. But that is where the benefits stop.
This rental home is about 300 square feet smaller than our current home and tenants have to pay for all utilities. I would expect that home to cost us a minimum of $2,200 to rent per month. And that is without any kind of rental insurance!
Because we prefer to buy anyways (as opposed to rent) … it makes no sense for our family to rent a home.
Note – We did several searches for rental homes in our area similar to our house. The numbers were consistent with rental prices I highlighted above.
What’s Next for Us?
Owning a home has been the smarter choice for our family for the past decade. Not only has owning been cheaper than renting, but we have been building some equity in our home.
We don’t consider owning our home as an investment. The cost of owning a home is way too much to be considered the same as investing in the stock market or similar investments.
But that doesn’t mean our home is worthless. Despite little appreciation on our home, we still have been making principal payments for the past decade.
If we were renting (for a higher cost in our area) … then we would have no equity built up at all.
Plus we value living in a home that is ours.
There is one change however that we have been considering when it comes to our housing. We have been exploring the possibility of selling our current home to downsize to a much smaller home.
Our house is about 1,000 square foot to big for our current needs of the family.
So reducing our square footage could really help save money and reduce our overall housing expenses.
We have a plan to eventually make this move when the right opportunity comes up.