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  • Writer's pictureJim Carlson

The Rising Cost of Homeownership: A Cautionary Tale


A home in 2019 and 2023

The landscape of homeownership has drastically shifted over the past four years, making the dream of owning a home more challenging. The changes in interest rates and house prices have significantly affected the cost of homeownership. Let's delve into a comparative analysis between the state of homeownership four years ago and today.


The State of Homeownership Four Years Ago

Consider a home sold for $350,000 in 2019. With a 5% down payment, a homeowner would have needed $17,500 upfront. Assuming a mortgage interest rate of 4% for a 30-year fixed-rate mortgage, the monthly payment, including principal and interest, would have been approximately $1,595.


However, homeownership costs more than just the mortgage payment. There are property taxes and homeowner's insurance to consider, and with a down payment of less than 20%, private mortgage insurance (PMI) would have been applicable.


For our example, let's assume:

  • Annual property taxes: $2,800 ($233.33 per month)

  • Annual homeowners insurance: $1,000 ($83.33 per month)

  • Estimated PMI rate: 0.5% of loan amount annually ($1,415 annually or $117.92 per month)

So, the total monthly payment, including PMI, taxes, and insurance, would have been approximately $2,029.58.


The Cost of Homeownership Today

Fast forward to today, and the situation has significantly changed. Interest rates and house prices have climbed, leading to higher down payments and larger monthly mortgage payments.


Consider the same home, now valued at $490,300. With a 5% down payment, a homeowner now needs $24,515 upfront. The rise in interest rates to an estimated 6.75% for a 30-year fixed-rate mortgage further compounds the issue. The monthly payment for the principal and interest has now soared to $3,075.


For this updated scenario, let's assume:

  • Annual property taxes: $4,000 ($333.33 per month)

  • Annual homeowners insurance: $1,200 ($100 per month)

  • Estimated PMI rate: 0.5% of loan amount annually ($2,369.62 annually or $197.47 per month)

When adding in property taxes, homeowners insurance, and PMI (since the down payment is less than 20%), the total monthly payment amounts to $3,705.80.


Comparative Analysis

Here is a table that summarizes the comparison between the costs of homeownership in 2019 and today:

2019

2023

Difference

​Price

$350,000

$490,000

+ 40%

Down Payment (5%)

$17,500

$24,151

+ 40%

Interest Rate

4%

6.75%

+ 68.75%

Monthly Payment (Principal + Interest)

$1,595

$3,075

+ 92.79%

Total Monthly Payment (Including PMI, Taxes, and Insurance)

$2,029.58

$3,705.08

+ 82.57%

Yikes!


A Word of Caution

This comparative analysis serves as a stark reminder of the rapidly changing landscape of homeownership. The cost of buying a home has surged in just a few years, making it increasingly challenging for potential homeowners.


With higher down payments, larger monthly mortgage payments, and the addition of PMI for down payments less than 20%, homeownership today requires a significant financial commitment. It's also important to remember that these costs don't include ongoing maintenance and repair costs, which can also be substantial.


The challenge of homeownership in today's market shouldn't dissuade you from pursuing your dream of owning a home, but it should emphasize the importance of thorough planning and budgeting. Understanding the full costs of homeownership, saving diligently, and making informed decisions can help you navigate this challenging market.


Remember, a home is not just a place to live; it's a long-term investment. While it might be tempting to stretch your budget to buy your dream home, it's crucial to make sure you can comfortably afford your home, not just now but in the long term. After all, a home that strains your budget can become a source of stress, rather than the haven it should be.


So, stay informed, be patient, and keep your financial health a priority as you navigate the path of homeownership.


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