Owning a home isn’t cheap. That’s because there are many associated costs. Even so, some homes are far less expensive to own and maintain than others. In this article we’ll go over how to conduct home cost comparison, with the goal of helping you more accurately account for costs between homes when homebuying so that you can make more informed tradeoffs.
Baseline for Home Cost Comparison
To orient us, let’s briefly consider the relevant costs and characteristics of owning an average U.S. home. This will give us something that we can then tweak aspects of to illustrate the extent to which certain factors impact home costs.
- Purchase Price: $348,126 Zillow
- Square feet: 2,338 National Association of Home Builders
- Taxes: $2,795 per year Real Estate Witch
- Home Insurance: $1,516 per year Bankrate
- Utilities: $3,235 per year Bureau of of Labor Statistics
- Capital Expenses: $4,415.88 per year HomeAdvisor and NAHB1
- Maintenance: $2,909.64 per year Real Estate Investor Calculation2
And account of home costs is complete without the financing used at purchase. Below is a breakdown of average financing used by homebuyers in the U.S:
- Down payment: 14% ($48,738 in this case) National Association of Realtors
- Interest rate: 7.58% Bankrate
- Loan Term: 30 years
- Private mortgage insurance rate: 1% of mortgage amount ($249.49 per month in this case) Bankrate
Plugging all the above factors into the HomeEstimator app gives us an average monthly cost of $3,598.58. Maybe it makes more financial sense to rent, eh? (feel free to check out the article we wrote answering that question) But don’t despair just yet. Now we’ll consider which factors can be adjusted in order to lower those costs—in some cases pretty dramatically.
The Factors of Home Cost Comparison
Multiple factors are important to consider when comparing home costs, some more obvious or more important than others. Let’s walk through each, one by one.
Purchase Price
First and perhaps most obvious is the purchase price. Settling for a less expensive property can have a huge impact on monthly costs, especially when interest rates are high. This is for several reasons:
- A lower purchase price means a smaller loan, which can greatly lower loan payments.
- Taxes are often lower for less expensive properties.
- Some common methods of estimating maintenance costs are at least partially tied to the purchase price
- The same down payment for a more expensive property will be a higher percent for a less expensive one, which can reduce Private Mortgage Insurance
Regarding that last point, note that private mortgage insurance usually goes away altogether if the down payment is at or above 20% of the purchase price.
Now let’s say we reduce the purchase price of the average home to that of the average starter home, which is $243,000 according to Redfin. We could then lower tax and maintenance costs as appropriate and also eliminate private mortgage insurance (because the old down payment would be over 20% of the new purchase price).
The result is that the total ongoing home costs would drop by a whopping $1,104 per month, most of which is from the reduced financing expenses.
Square Footage
Yet another way to reduce costs is to settle for a smaller property. Here’s why:
- Smaller properties require less energy to heat and cool, which is significant because about half of U.S. home energy costs are for heating and cooling
- Home insurance tends to be less expensive for smaller properties because those are generally less expensive to rebuild in the event of a disaster
- Less square footage means it will be less expensive to replace certain things over time, namely flooring and interior paint
- Common methods of estimating maintenance costs are at least partially tied to property square footage
Returning to the average property, if we use equations for certain parameters such that one half of energy and maintenance costs and one quarter of the home insurance premium is proportional to square footage, and then we reduce property square footage to 1,100, which is fairly typical for a starter home, the ongoing costs drop by about $170 per month, or $2,040 per year.
Note that the impact here is only a fraction of the savings yielded by lowering the purchase price, though.
Capital Expenses
One more way to reduce costs is by settling for less expensive capital expense items when the time comes for their inevitable demise and replacement. For example, you might opt for less expensive flooring, more generic cabinets and countertops, or lower-end appliances (refrigerator, oven, laundry, etc.). Plugging in lower-end prices for those items, as listed on Home Depot’s website and other online sources, results in a modest cost reduction of about $97 per month.
If you’re willing to go without things like a garage and dishwasher, you can remove those from the equation altogether and lower costs further still—though doing so would only save about another $12 per month, so take that as you will.
All Together Now
We’ve gotten a taste for the sort of cost reductions we can get by altering aspects of a home. For fun, let’s see what happens when we implement them all together.
We take the average property and reduce its purchase price to $243,000. Then we reduce its square footage to 1,100 (using sqft-sensitive equations for things like maintenance, utilities, insurance, and certain CapEx), and enter lower-end prices for other capital expenses. That leaves us with an average monthly cost of $2,316.47—still pretty high, but it’s a reduction of almost $1,300 per month, or of $15,600 per year.
Note that reducing the purchase price accounts for the majority of the impact, resulting in about $1,104 per month of savings in isolation. But there is one more factor that can blow even that out of the water.
One More Option: Rent
The other way to effectively reduce home costs, possibly to greater effect than all the other factors combined, is to buy a property with a portion that you can rent out. Let’s see what happens, for instance, when we convert the average U.S. home into a duplex.
First we’ll make some of the costs adjust in response to the number of units the building has. As a result, garbage and water costs will double, as they’ll have to accommodate two families. Many capital expense costs will also double (a duplex has two furnaces, two water heaters, two sets of kitchen appliances—you get it). We’ll also say the insurance costs will increase by about one sixth, and the energy bill will increase a fair amount, too. All of that together gives us a modest cost increase of $253.44 per month.
But then we factor in rent.
According to Zumper.com, rent for a 3BR unit in my neck of the woods (Minneapolis, MN) is around $1,900 per month. If you put that towards offsetting the property’s ongoing costs, the expenses sit at around $1,787.92 per month. In other words, without implementing any of the other cost saving measures, buying a duplex and renting out the other unit reduces monthly costs by an extra $528 compared to applying all the other cost saving measures combined.
Home Cost Comparison Tool
For help with conducting home cost comparison on real homes, try out our HomeEstimator app. It has a comparison feature that lets you line up homes side-by-side to compare costs. You can also compare them based on other things, like likeability, upfront cash needed, and pretty much whatever else you’d like.
Source Explanations
- Capital Expense costs were calculated with replacement cost data from HomeAdvisor and lifespan data from this article from the National Association of Homebuilders. ↩︎
- Maintenance costs were calculated by taking the average of two common maintenance estimation methods: $1 per square and 1% of purchase price. ↩︎
